SB 1349: Taxation: tax expenditures: Legislative Analyst’s Office: assessment, report, and recommendation.
- Session Year: 2025-2026
- House: Senate
- Latest Version Date: 2026-09-20
Current Status:
Passed
(2026-09-20: Chaptered by Secretary of State. Chapter 433, Statutes of 2026.)
Introduced
In Committee
Awaiting First Chamber Vote
Passed First Chamber
In Committee
Awaiting Second Chamber Vote
Passed Second Chamber
Enacted
What does this bill do?
The bill requires the Legislative Analyst’s Office to study and report on several large state tax breaks (including the waters‑edge election, research tax credits, stepped‑up basis for inherited property, like‑kind exchanges, R&D depreciation deductions, and a special cable operator tax rule) and recommend whether to keep, change, or repeal them. Each report must identify possible savings, analyze effects on the state General Fund and education funding (Proposition 98), consider impacts on jobs and the economy, and rely on anonymized taxpayer data provided by state tax agencies.
The summary is provided by generative AI which can make mistakes. For original language, please view the details in the table below.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing each report, including 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.
The bill would require LAO to complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter until the fifth and final report is submitted on January 1, 2032. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, to hold a joint public hearing on these reports by each August 15 of the second year of the legislative session, as specified. To the extent that LAO needs access to taxpayer data and information, the bill would require the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department to ensure that relevant anonymized taxpayer data is made available and ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data. The bill would repeal its provisions on January 1, 2033.
The bill would make findings and declarations relating to these provisions.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing each report, including 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.
The bill would require LAO to complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter until the fifth and final report is submitted on January 1, 2032. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, to hold a joint public hearing on these reports by each August 15 of the second year of the legislative session, as specified. To the extent that LAO needs access to taxpayer data and information, the bill would require the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department to ensure that relevant anonymized taxpayer data is made available and ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data. The bill would repeal its provisions on January 1, 2033.
The bill would make findings and declarations relating to these provisions.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing each report, including 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.
The bill would require LAO to complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, January 1, 2028, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter until the fifth and final report is submitted on January 1, 2032. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, to hold a joint public hearing on these reports by each August 15 of the second year of the legislative session, as specified. To the extent that LAO needs access to taxpayer data and information, the bill would require the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department to ensure that relevant anonymized taxpayer data is made available and ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data. The bill would repeal its provisions on January 1, 2033.
The bill would make findings and declarations relating to these provisions.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing each report, including 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.
The bill would require LAO to complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually, as determined by LAO, thereafter. annually thereafter until January 1, 2032. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, in each legislative session in which a comprehensive assessment of a major tax expenditure is completed, to hold a joint public hearing on the report these reports by each August 15 of the second year of the legislative session. session, as specified. The bill would repeal its provisions on January 1, 2033.
The bill would make findings and declarations relating to these provisions.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO), by January 1, 2029, (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report that comprehensively assesses on each major tax expenditures, as defined, of the state, expenditure, and make a recommendation to the Legislature based on the each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing the each report, including the impact on the General Fund. 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.
The bill would require the scope of each comprehensive assessment to include certain specified information, to the extent possible, including a brief description of the beneficiaries of each tax expenditure, as specified.The bill would require LAO to submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, as specified, and to complete and publish the report on its internet website. website its first report on a major tax expenditure by October 15, 2027, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually, as determined by LAO, thereafter. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, after receipt of the report by the Legislature, in each legislative session in which a comprehensive assessment of a major tax expenditure is completed, to hold a joint public hearing on the report by August 15 of the second year of the legislative session.
The bill would require the recommendation from LAO to the Legislature based on the report to include certain specified information, including the extent to which each major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.The bill would make these provisions inoperative 6 months after the hearing described above, and repeal them the following January. The bill would make findings and declarations relating to these provisions.
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, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.
The bill would require the Legislative Analysts Office (LAO), by January 1, 2029, to write and publish a report that comprehensively assesses major tax expenditures, as defined, of the state, and make a recommendation to the Legislature based on the report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can reduce or eliminate from realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing the report, including the impact on the General Fund.
The bill would require the scope of each comprehensive assessment to include certain specified information, to the extent possible, including a brief description of the beneficiaries of each tax expenditure, as specified.
The bill would require LAO to submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, as specified, and to publish the report on its internet website. The bill would require the Senate Committee on Revenue and Taxation 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.
The bill would require the recommendation from LAO to the Legislature based on the report to include certain specified information, including the extent to which each major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.
The bill would make these provisions inoperative 6 months after the hearing described above, and repeal them the following January. The bill would make findings and declarations relating to these provisions.
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, provides 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.The bill would require the board, by October 1, 2027, to hold an open and public meeting to consider information provided by the public for the purpose of determining the schedule for comprehensive assessments of major tax expenditures to be conducted by the Legislative Analysts Office (LAO), as specified. TheThe bill would require the board, by January 1, 2028, to meet to finalize the schedule for comprehensive assessments of Legislative Analysts Office (LAO), by January 1, 2029, to write and publish a report that comprehensively assesses major tax expenditures, as defined, of the state, and make a recommendation to the Legislature based on the report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can reduce or eliminate from the major tax expenditures, and require them to consider certain criteria when finalizing the schedule, report, including the impact on the General Fund.
The bill would require the board to set a deadline date as part of determining the schedule for LAO to complete its comprehensive assessments of major tax expenditures, as specified. The bill would require LAO to complete its comprehensive assessments of major tax expenditures and provide them to the board by the deadline date specified in the schedule.The bill would require the board to determine the scope of each comprehensive assessment, which would assessment to include certain specified information, to the extent possible, including a brief description of the beneficiaries of the each tax expenditure, as specified, and would require the board to post a 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, 2029, as specified. The specified.
The bill would also require the board LAO to submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Governance and Finance, Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, as specified, and post it to publish the report on its internet website. The bill would require the Senate Committee on Governance and Finance Revenue and Taxation 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.
The bill would require the recommendation from LAO to the Legislature based on the report to include certain specified information, including the extent to which each major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.
The bill would make these provisions inoperative 6 months after the hearing described above, and repeal them the following January. The bill would make findings and declarations relating to these provisions.
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, provides 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.
The bill would require the board, by October 1, 2027, to hold an open and public meeting to consider information provided by the public for the purpose of determining the schedule for comprehensive assessments of major tax expenditures to be conducted by the Legislative Analysts Office (LAO), as specified. The bill would require the board, by January 1, 2028, to meet to finalize the schedule for comprehensive assessments of major tax expenditures, and require them to consider certain criteria when finalizing the schedule, including the impact on the General Fund.
The bill would require the board to set a deadline date as part of determining the schedule for LAO to complete its comprehensive assessments of major tax expenditures, as specified. The bill would require LAO to complete its comprehensive assessments of major tax expenditures and provide them to the board by the deadline date specified in the schedule.
The bill would require the board to determine the scope of each comprehensive assessment, which would include certain specified information, including a brief description of the beneficiaries of the tax expenditure, as specified, and would require the board to post a 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, 2029, 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.
The bill would make these provisions inoperative 6 months after the hearing described above, and repeal them the following January. The bill would make findings and declarations relating to these provisions.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
(g)California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.
(h)It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)For the purposes of this section, major tax expenditure includes all of the following:
(1)The waters-edge election allowed by Section 25110.
(2)The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.
(3)The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.
(4)The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Sections 18031 and 18031.5 of the Personal Income Tax Law (Part 10 (commencing with Section 17001) of Division 2) and Sections 24941 and 24941.5 of the Corporation Tax Law (Part 11 (commencing with Section 23001) of Division 2).
(5)The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.
(6)The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.
(b)The Legislative Analysts Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.
(c)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider all of the following criteria when finalizing each report:
(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 expenditures effect on the General Fund, including Proposition 98.
(3)An analysis of the major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(d)The Legislative Analysts Office shall complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter, until the fifth and final report is submitted on January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Section 9795 of the Government Code.
(e)The Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the first report submitted pursuant to subdivision (d) by August 15, 2028, and a joint public hearing on the two most recent reports submitted pursuant to subdivision (d) by each August 15 of the second year of the legislative session thereafter.
(f)To the extent that the Legislative Analysts Office needs access to taxpayer data and information, the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department shall ensure that relevant anonymized taxpayer data is made available and shall ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data.
(g)This section shall remain in effect only until January 1, 2033, and as of that date is repealed.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
(g)California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.
(h)It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)For the purposes of this section, major tax expenditure includes all of the following:
(1)The waters-edge election allowed by Section 25110.
(2)The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.
(3)The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.
(4)The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Sections 18031 and 18031.5 of the Personal Income Tax Law (Part 10 (commencing with Section 17001) of Division 2) and Sections 24941 and 24941.5 of the Corporation Tax Law (Part 11 (commencing with Section 23001) of Division 2).
(5)The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.
(6)The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.
(b)The Legislative Analysts Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.
(c)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider all of the following criteria when finalizing each report:
(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 expenditures effect on the General Fund, including Proposition 98.
(3)An analysis of the major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(d)The Legislative Analysts Office shall complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter, until the fifth and final report is submitted on January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Section 9795 of the Government Code.
(e)The Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the first report submitted pursuant to subdivision (d) by August 15, 2028, and a joint public hearing on the two most recent reports submitted pursuant to subdivision (d) by each August 15 of the second year of the legislative session thereafter.
(f)To the extent that the Legislative Analysts Office needs access to taxpayer data and information, the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department shall ensure that relevant anonymized taxpayer data is made available and shall ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data.
(g)This section shall remain in effect only until January 1, 2033, and as of that date is repealed.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
(g)California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.
(h)It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)For the purposes of this section, major tax expenditure includes all of the following:
(1)The waters-edge election allowed by Section 25110.
(2)The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.
(3)The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.
(4)The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Sections 18031 and 18031.5 of the Personal Income Tax Law (Part 10 (commencing with Section 17001) of Division 2) and Sections 24941 and 24941.5 of the Corporation Tax Law (Part 11 (commencing with Section 23001) of Division 2).
(5)The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.
(6)The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.
(b)The Legislative Analysts Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.
(c)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider all of the following criteria when finalizing each report:
(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 expenditures effect on the General Fund, including Proposition 98.
(3)An analysis of the major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(d)The Legislative Analysts Office shall complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, January 1, 2028, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter, until the fifth and final report is submitted on January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Section 9795 of the Government Code.
(e)The Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the first report submitted pursuant to subdivision (d) by August 15, 2028, and a joint public hearing on the two most recent reports submitted pursuant to subdivision (d) by each August 15 of the second year of the legislative session thereafter.
(f)To the extent that the Legislative Analysts Office needs access to taxpayer data and information, the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department shall ensure that relevant anonymized taxpayer data is made available and shall ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data.
(f)(g)This section shall remain in effect only until January 1, 2033, and as of that date is repealed.
REVISIONS: HeadingLine 4.The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
(g)California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.
(h)It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)For the purposes of this section, major tax expenditure includes all of the following:
(1)The waters-edge election allowed by Section 25110.
(2)The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.
(3)The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.
(4)The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Section 24941 and Section 24941.5. Sections 18031 and 18031.5 of the Personal Income Tax Law (Part 10 (commencing with Section 17001) of Division 2) and Sections 24941 and 24941.5 of the Corporation Tax Law (Part 11 (commencing with Section 23001) of Division 2).
(5)The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.
(6)The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.
(b)The Legislative Analysts Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.
(c)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider all of the following criteria when finalizing each report:
(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 expenditures effect on the General Fund, including Proposition 98.
(3)An analysis of the major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(d)The Legislative Analysts Office shall complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually, as determined by the office, thereafter. annually thereafter, until January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Section 9795 of the Government Code.
(e)In each legislative session in which a comprehensive assessment of a major tax expenditure is completed pursuant to subdivision (a), the The Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the assessment first report submitted pursuant to subdivision (d) by August 15, 2028, and a joint public hearing on the two most recent reports submitted pursuant to subdivision (d) by each August 15 of the second year of the legislative session. session thereafter.
(f)This section shall remain in effect only until January 1, 2033, and as of that date is repealed.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
(g)California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.
(h)It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)By January 1, 2029, the Legislative Analysts Office shall write and publish a report that comprehensively assesses major tax expenditures of the state, and make a recommendation to the Legislature based on the report, pursuant to this section.(b)(1)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider the following criteria when finalizing the report:(A)The impact on the General Fund.(B)The Legislative Analysts Offices assessment of whether modification to or repeal of each major tax expenditure would provide the most positive impacts on the General Fund with the least negative economic, social, or environmental impacts.(2)Any other state agency shall assist the Legislative Analysts Office with completing its comprehensive assessments of major tax expenditures to the maximum degree practicable.(c)The scope of each comprehensive assessment shall include, but not be limited to, all of the following, to the extent possible:(1)A description of the legislative intent for each tax expenditure, if the act adding or amending the tax 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 each 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 each tax expenditure to the State of California.(7)The total net General Fund moneys lost due to each tax expenditure, 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 each tax expenditure, including what impact the shift in resources has on educational programs.(9)The potential environmental impacts of each tax expenditure, if any.(10)A long-term analysis outlining the true beneficiaries versus intended beneficiaries of each tax expenditure, and its impact on the business climate and market conditions.(11)Jobs in California created by each tax expenditure, including all of the following additional information:(A)Whether the jobs created were short- or long-term positions, as well as the average salary and benefits provided for the jobs created.(B)The number of jobs lost or reduced in areas impacted by each tax expenditure, or whether jobs were shifted to other sectors.(C)The data in subparagraphs (A) and (B) must include, in the aggregate, demographics on gender, race, ethnicity, and age. (d)(1)The Legislative Analysts Office shall submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, and publish the report on its internet website.(2)(A)The requirement for submitting a report imposed under paragraph (1) is inoperative on January 1, 2033, pursuant to Section 10231.5 of the Government Code. (B)The report to the Legislature shall be submitted in compliance with Section 9795 of the Government Code.(3)Upon receipt of the report required by paragraph (1), the Senate Committee on Revenue and Taxation 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 the legislative session.(e)The recommendation from the Legislative Analysts Office to the Legislature based on the report shall include, but not be limited to, all of the following in its basis:(1)The extent to which each 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 each major tax expenditures effect on the General Fund.(3)An analysis of each major tax expenditures effect on employment, wages, and the states economy.(4)Whether opportunities exist to improve the effectiveness of each major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.(f)For purposes of this section, major tax expenditure means a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria:(1)The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars ($1,000,000,000) in total over the previous 10 fiscal years, and does not contain any of the following, as of January 1, 2027:(A)A repeal or inoperative date.(B)A requirement to report any metrics of efficacy.(2)Is not a sales and use tax exemption pursuant to Section 6353, 6359, 6369, or 6369.1.(3)Is not allowed only against personal income tax imposed under Part 10 (commencing with Section 17001) of Division 2.(4)Is not authorized by Chapter 4 (commencing with Section 23701) of Part 11 of Division 2.(5)Is not allowed as a deduction under Section 17201 by conformity to Section 170 of the Internal Revenue Code or Section 24357.(6)Is not excluded as income under the following:(A)Section 17131 by conformity to Section 101 of the Internal Revenue Code, as modified by Section 17132.5.(B)Section 17081 by conformity to Section 72 of the Internal Revenue Code, as modified by Section 17085.(C)Section 24302. (D)Section 24305.(g)This section shall become inoperative on the date six months after the hearing in paragraph (3) of subdivision (d), and shall be repealed on the following January 1.SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)For the purposes of this section, major tax expenditure includes all of the following:
(1)The waters-edge election allowed by Section 25110.
(2)The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.
(3)The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.
(4)The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Section 24941 and Section 24941.5.
(5)The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.
(6)The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.
(b)The Legislative Analysts Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.
(c)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider all of the following criteria when finalizing each report:
(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 expenditures effect on the General Fund, including Proposition 98.
(3)An analysis of the major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(d)The Legislative Analysts Office shall complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually, as determined by the office, thereafter.
(e)In each legislative session in which a comprehensive assessment of a major tax expenditure is completed pursuant to subdivision (a), the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the assessment by August 15 of the second year of the legislative session.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)By January 1, 2029, the Legislative Analysts Office shall write and publish a report that comprehensively assesses major tax expenditures of the state, and make a recommendation to the Legislature based on the report, pursuant to this section.
(b)(1)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can reduce or eliminate from realize by reducing or limiting the major tax expenditures. The Legislative Analysts Office shall consider the following criteria when finalizing the report:
(A)The impact on the General Fund.
(B)The Legislative Analysts Offices assessment of whether modification to or repeal of each major tax expenditure would provide the most positive impacts on the General Fund with the least negative economic, social, or environmental impacts.
(2)Any other state agency shall assist the Legislative Analysts Office with completing its comprehensive assessments of major tax expenditures to the maximum degree practicable.
(c)The scope of each comprehensive assessment shall include, but not be limited to, all of the following, to the extent possible:
(1)A description of the legislative intent for each tax expenditure, if the act adding or amending the tax 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 each 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 each tax expenditure to the State of California.
(7)The total net General Fund moneys lost due to each tax expenditure, 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 each tax expenditure, including what impact the shift in resources has on educational programs.
(9)The potential environmental impacts of each tax expenditure, if any.
(10)A long-term analysis outlining the true beneficiaries versus intended beneficiaries of each tax expenditure, and its impact on the business climate and market conditions.
(11)Jobs in California created by each tax expenditure, including all of the following additional information:
(A)Whether the jobs created were short- or long-term positions, as well as the average salary and benefits provided for the jobs created.
(B)The number of jobs lost or reduced in areas impacted by each tax expenditure, or whether jobs were shifted to other sectors.
(C)The data in subparagraphs (A) and (B) must include, in the aggregate, demographics on gender, race, ethnicity, and age.
(d)(1)The Legislative Analysts Office shall submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, and publish the report on its internet website.
(2)(A)The requirement for submitting a report imposed under paragraph (1) is inoperative on January 1, 2033, pursuant to Section 10231.5 of the Government Code.
(B)The report to the Legislature shall be submitted in compliance with Section 9795 of the Government Code.
(3)Upon receipt of the report required by paragraph (1), the Senate Committee on Revenue and Taxation 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 the legislative session.
(e)The recommendation from the Legislative Analysts Office to the Legislature based on the report shall include, but not be limited to, all of the following in its basis:
(1)The extent to which each 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 each major tax expenditures effect on the General Fund.
(3)An analysis of each major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of each major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(f)For purposes of this section, major tax expenditure means a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria:
(1)The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars ($1,000,000,000) in total over the previous 10 fiscal years, and does not contain any of the following, as of January 1, 2027:
(A)A repeal or inoperative date.
(B)A requirement to report any metrics of efficacy.
(2)Is not a sales and use tax exemption pursuant to Section 6353, 6359, 6369, or 6369.1.
(3)Is not allowed only against personal income tax imposed under Part 10 (commencing with Section 17001) of Division 2.
(4)Is not authorized by Chapter 4 (commencing with Section 23701) of Part 11 of Division 2.
(5)Is not allowed as a deduction under Section 17201 by conformity to Section 170 of the Internal Revenue Code or Section 24357.
(6)Is not excluded as income under the following:
(A)Section 17131 by conformity to Section 101 of the Internal Revenue Code, as modified by Section 17132.5.
(B)Section 17081 by conformity to Section 72 of the Internal Revenue Code, as modified by Section 17085.
(C)Section 24302.
(D)Section 24305.
(g)This section shall become inoperative on the date six months after the hearing in paragraph (3) of subdivision (d), and shall be repealed on the following January 1.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
SEC. 2.Section 42 is added to the Revenue and Taxation Code, to read:42.(a)There is hereby established in state government the California Tax Expenditure Review Board as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature.(b)The board shall meet and convene meetings as required by this section and Section 43 at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act (Article 9 (commencing with Section 11120) of Chapter 1 of Part 1 of Division 3 of Title 2 of the Government Code).(c)The board shall be composed of five members who shall serve in an advisory capacity, as follows:(1)The Controller, or the Controllers designee.(2)The Legislative Analyst, or the Legislative Analysts designee.(3)The California State Auditor, or the California State Auditors designee.(4)The Director of Finance, or the Director of Finances designee.(5)An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and the tax expenditures administered by the California Department of Tax and Fee Administration and the Franchise Tax Board.(d)The Controller shall serve as chairperson of the board.(e)The members of the board shall serve without compensation, but shall be reimbursed for necessary travel and other expenses incurred in performing their duties and responsibilities.(f)The board may establish advisory committees that include members of the public.(g)The board and any advisory committee shall keep official records of all of their proceedings.(h)For purposes of this section and Section 43, major tax expenditure means a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria:(1)The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars ($1,000,000,000) in total over the previous 10 fiscal years, and does not contain any of the following, as of January 1, 2027:(A)A repeal or inoperative date.(B)A requirement to report any metrics of efficacy.(2)Is not a sales and use tax exemption pursuant to Section 6353, 6359, 6369, or 6369.1.(3)Is not allowed only against personal income tax imposed under Part 10 (commencing with Section 17001) of Division 2.(4)Is not authorized by Chapter 4 (commencing with Section 23701) of Part 11 of Division 2.(5)Is not allowed as a deduction under Section 17201 by conformity to Section 170 of the Internal Revenue Code or Section 24357.(6)Is not excluded as income under the following:(A)Section 17131 by conformity to Section 101 of the Internal Revenue Code, as modified by Section 17132.5.(B)Section 17081 by conformity to Section 72 of the Internal Revenue Code, as modified by Section 17085.(C)Section 24302. (D)Section 24305.(i)This section shall become inoperative on the date six months after the hearing in subdivision (i) of Section 43, and shall be repealed the following January 1.SEC. 3.SEC. 2.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)By October 1, 2027, the California Tax Expenditure Review Board shall hold an open and public meeting to consider information provided by the public for the purpose of determining the schedule for comprehensive assessments of major tax expenditures to be conducted by the Legislative Analysts Office. The board shall begin to determine the schedule after completion of that meeting.43.(a)By January 1, 2029, the Legislative Analysts Office shall write and publish a report that comprehensively assesses major tax expenditures of the state, and make a recommendation to the Legislature based on the report, pursuant to this section.
(b)By January 31, 2028, the board shall meet to finalize the schedule for comprehensive assessments of major tax expenditures. (1)As part of the comprehensive assessments, the Legislative Analysts Office shall identify any savings that the Legislature can reduce or eliminate from the major tax expenditures. The board Legislative Analysts Office shall consider the following criteria when finalizing the schedule: report:
(1)(A)The impact on the General Fund.
(2)(B)The boards Legislative Analysts Offices assessment of whether modification to or repeal of the each major tax expenditure would provide the most positive impacts on the General Fund with the least negative economic, social, or environmental impacts.
(3)The ability for the Legislative Analysts Office to complete each comprehensive assessment of the major tax expenditure in a timely fashion.(c)The board shall set a deadline date as part of determining the schedule for the Legislative Analysts Office to complete its comprehensive assessments of major tax expenditures. The board can vote to adjust the deadline date for reasonable cause.(d)The Legislative Analysts Office shall complete its comprehensive assessments of major tax expenditures and provide them to the board by the deadline date specified in the schedule. Any(2)Any other state agency shall assist the Legislative Analysts Office with completing its comprehensive assessments of major tax expenditures to the maximum degree practicable.
(e)(c)The board shall determine scope of each comprehensive assessment, which assessment shall include, but not be limited to, all of the following, to the extent possible:
(1)A description of the legislative intent for each tax expenditure, if the act adding or amending the tax 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 each 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 each tax expenditure to the State of California.
(7)The total net General Fund moneys lost due to the each tax expenditure, 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 each tax expenditure, including what impact the shift in resources has on educational programs.
(9)The potential environmental impacts of the each tax expenditure, if any.
(10)A long-term analysis outlining the true beneficiaries versus intended beneficiaries of the each tax expenditure, and its impact on the business climate and market conditions.
(11)Jobs in California created by the each tax expenditure, including all of the following additional information:
(A)Whether the jobs created were short- or long-term positions, as well as the average salary and benefits provided for the jobs created.
(B)The number of jobs lost or reduced in areas impacted by the each tax expenditure, or whether jobs were shifted to other sectors.
(C)The data in subparagraphs (A) and (B) must include, in the aggregate, demographics on gender, race, ethnicity, and age.
(f)After receiving a comprehensive assessment from the Legislative Analysts Office, the board shall post it on its internet website.(g)(1)After a comprehensive assessment of a major tax expenditure has been posted on the boards internet website for at least 14 days, and no later than two months from the date the board posts a 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. Nothing in this section shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.(2)The board shall consider information provided by the public in response to the comprehensive assessment at the meeting before making the recommendation. (3)The recommendation from the board to the Legislature shall include, but not be limited to, all of the following:(A)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.(B)An analysis of the major tax expenditures effect on the General Fund.(C)An analysis of the effect on employment, wages, and the states economy.(D)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal the major tax expenditure.(h)By January 1, 2029, the board shall provide a report to the Legislature that compiles all of its recommendations regarding major tax expenditures made, including any recommendation the board failed to make for a major tax expenditure for which the Legislative Analysts Office has completed a comprehensive assessment, and the reasons for the failure.(1)(d)(1)The board Legislative Analysts Office shall also submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Governance and Finance, Revenue and Taxation, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, and post it publish the report on its internet website.
(2)(A)The requirement for submitting a report imposed under paragraph (1) is inoperative on January 1, 2033, pursuant to Section 10231.5 of the Government Code.
(2)(B)The report to the Legislature shall be submitted in compliance with Section 9795 of the Government Code.
(i)(3)Upon receipt of the report required by subdivision (h), paragraph (1), the Senate Committee on Governance and Finance Revenue and Taxation 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 the legislative session.
(e)The recommendation from the Legislative Analysts Office to the Legislature based on the report shall include, but not be limited to, all of the following in its basis:
(1)The extent to which each 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 each major tax expenditures effect on the General Fund.
(3)An analysis of each major tax expenditures effect on employment, wages, and the states economy.
(4)Whether opportunities exist to improve the effectiveness of each major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
(f)For purposes of this section, major tax expenditure means a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria:
(1)The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars ($1,000,000,000) in total over the previous 10 fiscal years, and does not contain any of the following, as of January 1, 2027:
(A)A repeal or inoperative date.
(B)A requirement to report any metrics of efficacy.
(2)Is not a sales and use tax exemption pursuant to Section 6353, 6359, 6369, or 6369.1.
(3)Is not allowed only against personal income tax imposed under Part 10 (commencing with Section 17001) of Division 2.
(4)Is not authorized by Chapter 4 (commencing with Section 23701) of Part 11 of Division 2.
(5)Is not allowed as a deduction under Section 17201 by conformity to Section 170 of the Internal Revenue Code or Section 24357.
(6)Is not excluded as income under the following:
(A)Section 17131 by conformity to Section 101 of the Internal Revenue Code, as modified by Section 17132.5.
(B)Section 17081 by conformity to Section 72 of the Internal Revenue Code, as modified by Section 17085.
(C)Section 24302.
(D)Section 24305.
(j)(g)This section shall become inoperative on the date six months after the hearing in paragraph (3) of subdivision (i), (d), and shall be repealed on the following January 1.
The Legislature finds and declares all of the following:
(a)Californias publicly funded K14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.
(b)The Legislature has consistently advanced tax expenditures, including credits and sales and use 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
(c)Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of Californias students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that Californias dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
(d)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.
(e)In 2016, the California State Auditor questioned whether some of Californias 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.
(f)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.
SEC. 2.Section 42 is added to the Revenue and Taxation Code, to read:42.(a)There is hereby established in state government the California Tax Expenditure Review Board as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature.
(b)The board shall meet and convene meetings as required by this section and Section 43 at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act (Article 9 (commencing with Section 11120) of Chapter 1 of Part 1 of Division 3 of Title 2 of the Government Code).
(c)The board shall be composed of five members who shall serve in an advisory capacity, as follows:
(1)The Controller, or the Controllers designee.
(2)The Legislative Analyst, or the Legislative Analysts designee.
(3)The California State Auditor, or the California State Auditors designee.
(4)The Director of Finance, or the Director of Finances designee.
(5)An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and the tax expenditures administered by the California Department of Tax and Fee Administration and the Franchise Tax Board.
(d)The Controller shall serve as chairperson of the board.
(e)The members of the board shall serve without compensation, but shall be reimbursed for necessary travel and other expenses incurred in performing their duties and responsibilities.
(f)The board may establish advisory committees that include members of the public.
(g)The board and any advisory committee shall keep official records of all of their proceedings.
(h)For purposes of this section and Section 43, major tax expenditure means a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria:
(1)The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars ($1,000,000,000) in total over the previous 10 fiscal years, and does not contain any of the following, as of January 1, 2027:
(A)A repeal or inoperative date.
(B)A requirement to report any metrics of efficacy.
(2)Is not a sales and use tax exemption pursuant to Section 6353, 6359, 6369, or 6369.1.
(3)Is not allowed only against personal income tax imposed under Part 10 (commencing with Section 17001) of Division 2.
(4)Is not authorized by Chapter 4 (commencing with Section 23701) of Part 11 of Division 2.
(5)Is not allowed as a deduction under Section 17201 by conformity to Section 170 of the Internal Revenue Code or Section 24357.
(6)Is not excluded as income under the following:
(A)Section 17131 by conformity to Section 101 of the Internal Revenue Code, as modified by Section 17132.5.
(B)Section 17081 by conformity to Section 72 of the Internal Revenue Code, as modified by Section 17085.
(C)Section 24302.
(D)Section 24305.
(i)This section shall become inoperative on the date six months after the hearing in subdivision (i) of Section 43, and shall be repealed the following January 1.
SEC. 3.Section 43 is added to the Revenue and Taxation Code, to read:43.(a)By October 1, 2027, the California Tax Expenditure Review Board shall hold an open and public meeting to consider information provided by the public for the purpose of determining the schedule for comprehensive assessments of major tax expenditures to be conducted by the Legislative Analysts Office. The board shall begin to determine the schedule after completion of that meeting.
(b)By January 31, 2028, the board shall meet to finalize the schedule for comprehensive assessments of major tax expenditures. The board shall consider the following criteria when finalizing the schedule:
(1)The impact on the General Fund.
(2)The boards assessment of whether modification to or repeal of the major tax expenditure would provide the most positive impacts on the General Fund with the least negative economic, social, or environmental impacts.
(3)The ability for the Legislative Analysts Office to complete each comprehensive assessment of the major tax expenditure in a timely fashion.
(c)The board shall set a deadline date as part of determining the schedule for the Legislative Analysts Office to complete its comprehensive assessments of major tax expenditures. The board can vote to adjust the deadline date for reasonable cause.
(d)The Legislative Analysts Office shall complete its comprehensive assessments of major tax expenditures and provide them to the board by the deadline date specified in the schedule. Any other state agency shall assist the Legislative Analysts Office with completing its comprehensive assessments of major tax expenditures to the maximum degree practicable.
(e)The board shall determine scope of each comprehensive assessment, which shall include, but not be limited to, the following, to the extent possible:
(1)A description of the legislative intent for each tax expenditure, if the act adding or amending the tax 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)The total net General Fund moneys lost due to the tax expenditure, 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 of the tax expenditure, if any.
(10)A long-term analysis outlining the true beneficiaries versus intended beneficiaries of the tax expenditure, and its impact on the business climate and market conditions.
(11)Jobs created by the tax expenditure, including all of the following additional information:
(A)Whether the jobs created were short- or long-term positions, as well as the average salary and benefits provided for the jobs created.
(B)The number of jobs lost or reduced in areas impacted by the tax expenditure, or whether jobs were shifted to other sectors.
(C)The data in subparagraphs (A) and (B) must include, in the aggregate, demographics on gender, race, ethnicity, and age.
(f)After receiving a comprehensive assessment from the Legislative Analysts Office, the board shall post it on its internet website.
(g)(1)After a comprehensive assessment of a major tax expenditure has been posted on the boards internet website for at least 14 days, and no later than two months from the date the board posts a 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. Nothing in this section shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.
(2)The board shall consider information provided by the public in response to the comprehensive assessment at the meeting before making the recommendation.
(3)The recommendation from the board to the Legislature shall include, but not be limited to, all of the following:
(A)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.
(B)An analysis of the major tax expenditures effect on the General Fund.
(C)An analysis of the effect on employment, wages, and the states economy.
(D)Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal the major tax expenditure.
(h)By January 1, 2029, the board shall provide a report to the Legislature that compiles all of its recommendations regarding major tax expenditures made, including any recommendation the board failed to make for a major tax expenditure for which the Legislative Analysts Office has completed a comprehensive assessment, and the reasons for the failure.
(1)The 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.
(2)The report to the Legislature shall be submitted in compliance with Section 9795 of the Government Code.
(i)Upon receipt of the report required by subdivision (h), 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 the legislative session.
(j)This section shall become inoperative on the date six months after the hearing in subdivision (i), and shall be repealed on the following January 1.
|
Date
|
Status
|
|---|---|
| Sep 20, 2026 | Chaptered by Secretary of State. Chapter 433, Statutes of 2026. |
| Sep 20, 2026 | Approved by the Governor. |
| Aug 28, 2026 | Enrolled and presented to the Governor at 4 p.m. |
| Aug 24, 2026 | Assembly amendments concurred in. (Ayes 30. Noes 10.) Ordered to engrossing and enrolling. |
| Aug 24, 2026 | Assembly amendments concurred in. (Ayes 30. Noes 10. Page 5691.) Ordered to engrossing and enrolling. |
| Aug 20, 2026 | In Senate. Concurrence in Assembly amendments pending. |
| Aug 20, 2026 | Read third time. Passed. (Ayes 57. Noes 18. Page 6303.) Ordered to the Senate. |
| Aug 20, 2026 | Read third time. Passed. Ordered to the Senate. |
| Aug 13, 2026 | Read second time. Ordered to third reading. |
| Aug 13, 2026 | Assembly Rule 63 suspended. |
| Aug 13, 2026 | Coauthors revised. |
| Aug 13, 2026 | From committee: Do pass. (Ayes 11. Noes 4.) (August 13). |
| Jul 1, 2026 | July 1 set for first hearing. Placed on suspense file. |
| Jun 17, 2026 | Read second time and amended. Re-referred to Com. on APPR. |
| Jun 16, 2026 | From committee: Do pass as amended and re-refer to Com. on APPR. (Ayes 5. Noes 1.) (June 15). |
| Jun 8, 2026 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on REV. & TAX. |
| May 26, 2026 | Referred to Com. on REV. & TAX. |
| May 20, 2026 | In Assembly. Read first time. Held at Desk. |
| May 19, 2026 | Read third time. Passed. (Ayes 30. Noes 8.) Ordered to the Assembly. |
| May 19, 2026 | Read third time. Passed. (Ayes 30. Noes 8. Page 4350.) Ordered to the Assembly. |
| May 14, 2026 | Read second time. Ordered to third reading. |
| May 14, 2026 | From committee: Do pass. (Ayes 5. Noes 2.) (May 14). |
| May 14, 2026 | From committee: Do pass. (Ayes 5. Noes 2. Page 4274.) (May 14). |
| May 8, 2026 | Set for hearing May 14. |
| May 4, 2026 | May 4 hearing: Placed on APPR. suspense file. |
| Apr 28, 2026 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on APPR. |
| Apr 24, 2026 | Set for hearing May 4. |
| Apr 16, 2026 | Withdrawn from committee. |
| Apr 16, 2026 | Re-referred to Com. on APPR. |
| Apr 14, 2026 | Read second time and amended. Re-referred to Com. on G.O. |
| Apr 13, 2026 | From committee: Do pass as amended and re-refer to Com. on G.O. (Ayes 4. Noes 1.) (April 8). |
| Apr 13, 2026 | From committee: Do pass as amended and re-refer to Com. on G.O. (Ayes 4. Noes 1. Page 3795.) (April 8). |
| Apr 6, 2026 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on REV. & TAX. |
| Mar 25, 2026 | Set for hearing April 8. |
| Mar 4, 2026 | Referred to Coms. on REV. & TAX. and G.O. |
| Feb 23, 2026 | Read first time. |
| Feb 23, 2026 | From printer. May be acted upon on or after March 23. |
| Feb 20, 2026 | Introduced. To Com. on RLS. for assignment. To print. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Aug 24, 2026 | Unfinished Business SB1349 Gonzalez et al. Concurrence | Senate Floor |
Passed |
|
| Aug 20, 2026 | SB 1349 Gonzalez Senate Third Reading By Connolly | Assembly Floor |
Passed |
|
| Aug 13, 2026 | Do pass. | Assembly Standing Committee on Appropriations |
Passed |
|
| Jun 15, 2026 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Revenue and Taxation |
Passed |
|
| May 19, 2026 | Senate 3rd Reading SB1349 Gonzalez et al. | Senate Floor |
Passed |
|
| May 14, 2026 | Do pass | Senate Standing Committee on Appropriations |
Passed |
|
| May 4, 2026 | Placed on suspense file | Senate Standing Committee on Appropriations |
Passed |
|
| Apr 8, 2026 | Do pass as amended, but first amend, and re-refer to the Committee on [Governmental Organization] | Senate Standing Committee on Revenue and Taxation |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| 1 individual | ** Support | |
| American Federation of State, County and Municipal Employees, AFL-CIO (Co-Source) | ** Support | |
| California Association Of School Business Officials | ** Support | |
| California Chamber Of Commerce | ** Against | |
| California Department of Tax and Fee Administration | ** Against | |
| California Federation of Labor Unions, Afl-cio | ** Support | |
| California Federation Of Teachers | ** Support | |
| California Life Sciences | ** Against | |
| California Professional Firefighters | ** Support | |
| California School Boards Association | ** Support | |
| California School Employees Association | ** Support | |
| California State Association Of Counties | ** Support | |
| California State Council of Service Employees International Union | ** Support | |
| California Tax Reform Association | ** Support | |
| California Taxpayers Association | ** Against | |
| California Teachers Association (Co-Source) | ** Support | |
| City of Thousand Oaks | ** Support | |
| Department Of Finance | ** Against | |
| Franchise Tax Board | ** Against | |
| Labor Coalition | ** Support | |
| League Of California Cities | ** Support | |
| Legislative Analyst's Office | ** Against | |
| Los Angeles Unified School District | ** Support | |
| One individual | ** Support | |
| State Auditor | ** Against | |
| The Arc and United Cerebral Palsy California Collaboration | ** Support | |
| United Domestic Workers/AFSCME Local 393 | ** Support |
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-4171 | SB 1349 |
UNFINISHED BUSINESS
Bill No: SB 1349
Author: Gonzalez (D), et al.
Amended: 6/17/26
Vote: 21
SENATE REVENUE AND TAXATION COMMITTEE: 4-1, 4/8/26
AYES: McNerney, Ashby, Becker, Grayson
NOES: Alvarado-Gil
SENATE APPROPRIATIONS COMMITTEE: 5-2, 5/14/26
AYES: Cervantes, Cabaldon, Grayson, Richardson, Wahab
NOES: Seyarto, Dahle
SENATE FLOOR: 30-8, 5/19/26
AYES: Allen, Archuleta, Arreguín, Ashby, Becker, Blakespear, Cabaldon, Caballero, Cervantes, Cortese, Durazo, Gonzalez, Grayson, Hurtado, Laird, Limón, McGuire, McNerney, Menjivar, Padilla, Pérez, Reyes, Richardson, Rubio, Smallwood-Cuevas, Stern, Umberg, Wahab, Weber Pierson, Wiener
NOES: Alvarado-Gil, Choi, Dahle, Jones, Ochoa Bogh, Seyarto, Strickland, Valladares
NO VOTE RECORDED: Grove, Niello
ASSEMBLY FLOOR: 57-18, 8/20/26 - See last page for vote
SUBJECT: Taxation: tax expenditures: Legislative Analyst’s Office: assessment, report, and recommendation
SOURCE: American Federation of State, County and Municipal Employees, AFL-CIO
California Teachers Association
DIGEST:
This bill directs the Legislative Analyst’s Office (LAO) to comprehensively assess the state’s major tax expenditures, as defined, issue a report, and make a recommendation to the Legislature.
Assembly Amendments
(1) Require LAO to complete its assessments by January 1, 2032; (2) Refine deadlines for legislative committees to hold hearings regarding the assessments; (3) Require LAO to submit assessments in compliance with specified provisions of the Government Code; (4) Provide LAO discretion to determine the sequence in which to publish its assessments; (5) Direct the Franchise Tax Board (FTB), California Department of Tax and Fee Administration (CDTFA), and Employment Development Department (EDD) to ensure that relevant anonymized taxpayer data is made available to LAO with appropriate levels of data security and privacy protections are in place; (6) Add cross references; and (7) Insert a January 1, 2033, sunset date.
ANALYSIS:
Existing law:
- Allows various income tax credits, deductions, exemptions, and exclusions, among them:
- The Research and Development Credit, calculated in partial conformity with federal law, that allows a credit against the Personal Income and Corporation Taxes for a taxpayer’s qualified research expenses incurred in California that exceed the base year amount, as defined, plus a percentage of the amount paid or incurred during the taxable year on research undertaken by a research consortium.
- Basis Step-Up on Inherited Property, in conformity with federal law, that “steps up” the basis of inherited property to fair market value as of the date of death under both the Personal Income and Corporation Taxes, so heirs do not pay taxes on gains from assets that appreciated in value when held by the decedent.
- Like-Kind Exchanges, in modified conformity with federal law, that defers the recognition of any gain or loss under both the Personal Income and Corporation Taxes on the exchange of property held for productive use in a trade or business or for investment, if that property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.
- Expensing of Research Expenses, in conformity with federal law, where taxpayers can elect to either deduct research and experimental expenditures under both the Personal Income and Corporation Taxes in full the year they were paid or incurred, or elect to capitalize and amortize them over at least 60 months.
- Allows an exception for qualified cable companies to the general requirement for multistate businesses to apportion net income to California for Corporation Tax purposes based on a factor equal to its California sales divided by its total sales. Qualified cable companies spending $250 million or more in California on certain expenditures can exclude half of their in-state sales when apportioning (Proposition 39, 2012).
- Permits taxpayers to either file on a worldwide combined reporting basis or to elect to calculate California income and activities on a water’s-edge basis. Generally, water’s-edge taxpayers may exclude income and apportionment factors of foreign-organized unitary affiliates that would otherwise be part of its unitary combined report, with some exceptions.
- Requires the Department of Finance (DOF) to annually publish a list of tax expenditures exceeding $5 million each November 1 with specified contents.
This bill:
- Directs the Legislative Analyst’s Office to comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report.
- Defines “major tax expenditure” to include:
- The Water’s Edge Election.
- The Research and Development Tax Credit.
- Basis Step-up on Inherited Property.
- Like-Kind exchanges.
- Expensing of Research Expenditures.
- Special apportionment for qualified cable companies.
- Requires LAO to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures as part of its assessments.
- Directs LAO to consider the following criteria when finalizing each report:
- 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.
- An analysis of the major tax expenditure’s effect on the General Fund, including Proposition 98.
- An analysis of the major tax expenditure’s effect on employment, wages, and the state’s economy.
- Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
- Requires LAO to complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and complete and publish on its internet website each subsequent report on a major tax expenditure in a sequence it determines until the fifth and final report is submitted January 1, 2032.
- Directs the LAO to submit its report in compliance with a specific provision of the Government Code.
- Requires the Senate and Assembly Committees on Revenue and Taxation to hold a joint public hearing on each assessment, commencing August 15, 2028, and again by each August 15th of the second year of each legislative session on the two most recent reports LAO submits.
- Directs FTB, CDTFA, and EDD to ensure that relevant anonymized taxpayer data is made available to LAO, with appropriate levels of data security and privacy protections for transferred or sensitive data.
- Makes legislative findings and declarations supporting its purposes.
- Sunsets its provisions on January 1, 2033.
Background
Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives 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 they would otherwise not do, but for the tax credit. According to DOF’s report, California foregoes around $94.2 billion per year as a result of its tax expenditures.
Many of the state’s tax expenditures that result in the most foregone revenue do not have sunset dates, some of which fully or partially conform with provisions of the Internal Revenue Code. However, many of California’s most significant tax expenditures do contain sunset dates. While the Legislature has extended sunsets for several tax expenditures like those noted above, they occasionally sunset and are repealed. In 2025, the New Employment Credit, which directed the Franchise Tax Board (FTB) to allocate credits for wages paid by taxpayers to qualified employees within areas that suffer from high levels of poverty and unemployment, sunset.
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. Additionally, FTB publishes several reports regarding specific tax credits.
Section 41. In 2014, Governor Brown signed SB 1335 (Leno, Chapter 845, Statutes of 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. The Legislature expanded Section 41 to include all tax expenditures under the Personal Income and Corporation Taxes, as well as sales and use tax exemptions (AB 263, Burke, Chapter 743, Statutes of 2019), but not Personal Income Tax exclusions when there is no available data to collect (AB 3289, Committee on Revenue and Taxation, Chapter 124, Statutes of 2024).
FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No
According to the Assembly Appropriations Committee:
- Likely absorbable cost pressures to the LAO to complete the five required reports on an annual basis. However, this committee sees a wide array of bills that require the LAO to measure different tax expenditures. Generally, a request to prepare an individual report would not generate significant new workload for the LAO. But, taken together, these proposals strain the ability of the LAO fulfill other existing or future legislative mandates and requests, as the LAO’s budget is subject to the Legislature’s constitutional spending cap (General Fund). The LAO notes that this bill would likely fully saturate the office’s existing capacity to perform tax expenditure analyses for the foreseeable future, meaning any subsequent legislation tasking the LAO with such new workload would necessitate additional staffing resources.
- Since the primary purpose of this bill is to create a report, this bill qualifies for this committee’s suspense file consistent with committee rules and custom and practice.
- Minor and absorbable costs to FTB and CDTFA to share anonymized taxpayer data with the LAO if needed. The EDD notes its estimated costs to enter into a data sharing agreement with the LAO would depend on the specific data elements requested and be subject to reimbursement by the LAO.
SUPPORT: (Verified 8/18/26)
American Federation of State, County and Municipal Employees, AFL-CIO (Co-Source)
California Teachers Association (Co-Source)
California Association of School Business Officials
California Federation of Labor Unions, AFL-CIO
California Federation of Teachers
California Professional Firefighters
California School Boards Association
California School Employees Association
California State Association of Counties
California State Council of Service Employees International Union
California Tax Reform Association
City of Thousand Oaks
Labor Coalition
League of California Cities
Los Angeles Unified School District
The Arc and United Cerebral Palsy California Collaboration
United Domestic Workers/AFSCME Local 393
1 Individual
OPPOSITION: (Verified 8/18/26)
California Chamber of Commerce
California Life Sciences
California Taxpayers Association
ARGUMENTS IN SUPPORT: According to the author, “California has over 100 tax expenditures that resulted in a $94 billion loss in general fund revenues in fiscal year 2025-26. Because programs established before 2014 lack modern performance standards, a 2016 State Auditor’s report found insufficient evidence that they are actually meeting their goals. This assessment of California’s largest corporate tax expenditures introduces long-overdue oversight into the use of taxpayer dollars. By providing a clear, data-driven report, SB 1349 will chart a path for California to invest its resources more effectively and accountably.”
ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association and California Chamber of Commerce, “We are concerned that SB 1349 would create an unnecessary step in state government to report findings relating to critical business tax policies California has adopted to encourage businesses to locate and expand in California, duplicating existing evaluations conducted by the Department of Finance and others. At a time when California’s state budget is facing cost pressures, and the Legislature and administration are seeking to minimize new program costs, any duplicative program that creates new costs for an evaluation that already exists is not necessary. While it is meritorious for the state to assess the effectiveness of tax policies and program expenditures, this measure would create significant uncertainty with respect to the future of the state’s tax structure and would adversely affect California’s ability to retain and attract jobs and investments. The threat of repealing tax incentives, given our state’s already high cost of doing business, poses a significant barrier to jobs, investment, and the state’s long-term economic growth.”
ASSEMBLY FLOOR: 57-18 8/20/26
AYES: Addis, Aguiar-Curry, Ahrens, Alvarez, Arambula, Ávila Farías, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Caloza, Carrillo, Connolly, Elhawary, Fong, Gabriel, Garcia, Gipson, Mark González, Haney, Harabedian, Hart, Irwin, Jackson, Kalra, Lee, Lowenthal, McKinnor, Muratsuchi, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Quirk-Silva, Ransom, Celeste Rodriguez, Michelle Rodriguez, Rogers, Schiavo, Schultz, Sharp-Collins, Solache, Soria, Stefani, Valencia, Ward, Wicks, Wilson, Zbur, Rivas
NOES: Alanis, Castillo, Davies, DeMaio, Dixon, Ellis, Flora, Jeff Gonzalez, Hadwick, Hoover, Johnson, Lackey, Macedo, Patterson, Sanchez, Ta, Tangipa, Wallis
NO VOTE RECORDED: Chen, Krell, Ramos, Blanca Rubio
Prepared by: Colin Grinnell / REV. & TAX. / (916) 651-4117
8/20/26 13:54:02
**** END ****
SENATE THIRD READING
STR Bill Id:SB 1349
Author:(Gonzalez)
As Amended Ver:June 17, 2026
Majority vote
SUMMARY
Requires the Legislative Analyst's Office (LAO) to comprehensively assess the "major tax expenditures" of the state, write and publish a report on each "major tax expenditure", and make a recommendation to the Legislature based on each report, as specified.
Major Provisions
- Defines the term "major tax expenditure" to include all of the following:
- The water's-edge election allowed by Revenue and Taxation Code (R&TC) Section 25110;
- The credits relating to increasing research activities allowed by R&TC Sections 17052.12 and 23609;
- The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in R&TC Sections 18031 and 24911;
- The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by R&TC Sections 18031 and 18031.5 of the Personal Income Tax Law and R&TC Sections 24941 and 24941.5 of the Corporation Tax Law;
- The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by R&TC Sections 17201 and 17201.1; and,
- The special apportionment of business income for qualified cable system operators pursuant to R&TC Section 25136.1.
- Provides that, as part of the comprehensive assessments, the LAO shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures.
- Requires the LAO to consider all of the following criteria when finalizing each report:
- 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;
- An analysis of the major tax expenditure's effect on the General Fund, including Proposition 98;
- An analysis of the major tax expenditure's effect on employment, wages, and the state's economy; and,
- Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
- Requires the LAO to complete and publish on its internet website its first report on a major tax expenditure by January 1, 2028, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually thereafter, until January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Government Code Section 9795.
- Requires the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the first report submitted by August 15, 2028, and a joint public hearing on the two most recent reports submitted by each August 15 of the second year of the legislative session thereafter.
COMMENTS
- 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 Department of Finance 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.
- What would this bill do? This bill seeks to establish a process for the state to systematically review some of its largest tax expenditures. This bill would require the LAO to comprehensively assess a set of "major tax expenditures", and to make a recommendation to the Legislature based on each report. The LAO is charged with, among other things, identifying any savings that the Legislature can realize by reducing or limiting these specific tax expenditure programs. The LAO would be required to complete and publish its first report by January 1, 2028, and to complete and publish each subsequent report annually thereafter, until January 1, 2032. Finally, this bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the first report by August 15, 2028, and a joint public hearing on the two most recent LAO reports by each August 15 of the second year of the legislative session thereafter. This bill's statutory provisions would thereafter sunset on January 1, 2033.
According to the Author
The author has provided the following statement in support of this bill:
As California navigates a structural budget deficit compounded by the threat of federal HR-1 cuts, we have an obligation to scrutinize every dollar spent. While direct spending is heavily debated each year, the tax expenditures targeted by SB 1349 quietly drain billions from our revenues without any expiration dates or oversight to prove they actually work.
SB 1349 injects much-needed scrutiny into this fiscal vacuum by directing the Legislative Analyst's Office to independently review five tax expenditures to determine whether they are a cost-effective use of resources to achieve their goals, what their effect is on the state's economy and employment, and whether there are opportunities for improvement through reform or repeal. When our state faces impossible choices about what public services to cut, continuing to hand out billions in unexamined tax subsidies is a luxury we simply cannot afford. We must ensure our current tax code is achieving its goals, rather than just shifting the burden onto everyday Californians. By providing a clear, data-driven report, SB 1349 will help ensure that California is investing its resources most effectively.
Arguments in Support
Supporters of this bill note the following:
By providing a non-partisan "scorecard" for our state's most significant tax programs, SB 1349 ensures that California's tax code remains a tool for progress rather than a source of unchecked fiscal leakage. Transparent, evidence-based evaluation is the only way to ensure that every dollar of foregone revenue is delivering a tangible return for the people of California.
Arguments in Opposition
Opponents of this bill note the following:
The mandate that the Legislative Analyst's Office publish a report assessing business-related tax expenditures is unnecessary and duplicative of functions currently performed by the Department of Finance, the Legislative Analyst's Office, the State Auditor, the Franchise Tax Board, the California Department of Tax and Fee Administration, and others. Reports and findings commissioned by the Legislature ought to be submitted directly to the Legislature, without any intermediary.
FISCAL COMMENTS
According to the Assembly Committee on Appropriations:
- Likely absorbable cost pressures to the LAO to complete the five required reports on an annual basis. However, this committee sees a wide array of bills that require the LAO to measure different tax expenditures. Generally, a request to prepare an individual report would not generate significant new workload for the LAO. But, taken together, these proposals strain the ability of the LAO [to] fulfill other existing or future legislative mandates and requests, as the LAO's budget is subject to the Legislature's constitutional spending cap (General Fund). The LAO notes that this bill would likely fully saturate the office's existing capacity to perform tax expenditure analyses for the foreseeable future, meaning any subsequent legislation tasking the LAO with such new workload would necessitate additional staffing resources.
Since the primary purpose of this bill is to create a report, this bill qualifies for this committee's suspense file consistent with committee rules and custom and practice.
- Minor and absorbable costs to FTB and CDTFA to share anonymized taxpayer data with the LAO if needed. The EDD notes its estimated costs to enter into a data sharing agreement with the LAO would depend on the specific data elements requested and be subject to reimbursement by the LAO.
VOTES
SENATE FLOOR: 30-8-2
YES: Allen, Archuleta, Arreguín, Ashby, Becker, Blakespear, Cabaldon, Caballero, Cervantes, Cortese, Durazo, Gonzalez, Grayson, Hurtado, Laird, Limón, McGuire, McNerney, Menjivar, Padilla, Pérez, Reyes, Richardson, Rubio, Smallwood-Cuevas, Stern, Umberg, Wahab, Weber Pierson, Wiener
NO: Alvarado-Gil, Choi, Dahle, Jones, Ochoa Bogh, Seyarto, Strickland, Valladares
ABS, ABST OR NV: Grove, Niello
ASM REVENUE AND TAXATION: 5-1-1
YES: Gipson, Carrillo, McKinnor, Quirk-Silva, Michelle Rodriguez
NO: DeMaio
ABS, ABST OR NV: Sanchez
ASM APPROPRIATIONS: 11-4-0
YES: Wicks, Arambula, Calderon, Caloza, Fong, Mark González, Krell, Pacheco, Pellerin, Sharp-Collins, Solache
NO: Hoover, Dixon, Ta, Tangipa
UPDATED
VERSION: June 17, 2026
CONSULTANT: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0003578
Date of Hearing: July 1, 2026
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Buffy Wicks, Chair
SBPCA Bill Id:SB 1349
Author:(Gonzalez) – As Amended Ver:June 17, 2026
Policy Committee: | Revenue and Taxation | Vote: | 5 - 1 |
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Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill requires the Legislative Analyst’s Office (LAO) to assess the state’s major tax expenditures and publish reports with related recommendations.
Specifically, this bill:
- Requires the LAO to comprehensively assess the state’s major tax expenditures, publish a report on each expenditure containing certain considerations, and make a recommendation to the Legislature based on each report, with the first report due by January 1, 2028, and subsequent reports published annually in a sequence determined by the LAO until the fifth and final report is submitted on January 1, 2032.
- Provides that a “major tax expenditure” includes the water’s edge election, credit for research and development, change in cost basis of inherited property, like-kind exchange, deduction of research and experimental expenses, and special apportionment of business income for qualified cable system operators.
- Requires the relevant legislative policy committees to hold a joint public hearing on published reports by each August 15 of the second year of the legislative session.
- Requires the Franchise Tax Board (FTB), Department of Tax and Fee Administration (CDTFA), and Employment Development Department (EDD) to ensure relevant anonymized taxpayer data is made available to the LAO to the extent the LAO needs access to such data to complete the reports.
FISCAL EFFECT:
- Likely absorbable cost pressures to the LAO to complete the five required reports on an annual basis. However, this committee sees a wide array of bills that require the LAO to measure different tax expenditures. Generally, a request to prepare an individual report would not generate significant new workload for the LAO. But, taken together, these proposals strain the ability of the LAO fulfill other existing or future legislative mandates and requests, as the LAO’s budget is subject to the Legislature’s constitutional spending cap (General Fund). The LAO notes that this bill would likely fully saturate the office’s existing capacity to perform tax expenditure analyses for the foreseeable future, meaning any subsequent legislation tasking the LAO with such new workload would necessitate additional staffing resources.
Since the primary purpose of this bill is to create a report, this bill qualifies for this committee’s suspense file consistent with committee rules and custom and practice.
- Minor and absorbable costs to FTB and CDTFA to share anonymized taxpayer data with the LAO if needed. The EDD notes its estimated costs to enter into a data sharing agreement with the LAO would depend on the specific data elements requested and be subject to reimbursement by the LAO.
COMMENTS:
- Purpose. According to the author:
As California navigates a structural budget deficit compounded by the threat of federal HR-1 cuts, we have an obligation to scrutinize every dollar spent. While direct spending is heavily debated each year, the tax expenditures targeted by SB 1349 quietly drain billions from our revenues without any expiration dates or oversight to prove they actually work.
- Tax Expenditure Reports. As the Department of Finance (DOF) notes in its annual Tax Expenditure Report, there are several key differences between a tax expenditure and direct expenditure. Generally, tax expenditures are reviewed less frequently than direct expenditures and there is less budgetary control over the amount of revenue loss associated with a tax expenditure. Additionally, once enacted, a two-thirds vote of the Legislature is needed to rescind an existing tax expenditure absent a sunset date, effectively resulting in a “one-way ratchet” whereby a tax expenditure may be enacted by majority vote, but cannot be repealed without a supermajority vote, irrespective of the expenditure’s efficacy or cost.
This bill requires the LAO, over the course of five years, to assess five of six specified major tax expenditures and make a recommendation to the Legislature regarding the expenditure based on the assessment. As noted in the Assembly Revenue and Taxation Committee’s analysis of this bill:
Members and legislative staff receive a significant number of reports each year, many mandated by statute…The state also prepares reports specifically examining the state’s tax expenditure programs. Most notably, the DOF already prepares an annual report that comprehensively lists all tax expenditures exceeding $5 million in annual cost.
It should also be noted that this Committee has held multiple informational hearings on the state’s tax expenditure programs. The most recent such hearing was held on February 22, 2023. As such, the Committee may wish to assess whether additional reporting on the state’s tax expenditure programs would be beneficial to the policymaking process.
- Support and Opposition. This bill is co-sponsored by AFSCME and the California Teachers Association, with the latter arguing, “At a time when we are faced with a structural deficit, California should examine tax expenditures to ensure that they are achieving their public policy objectives and making the best use of limited public dollars.” This bill is also supported by other labor organizations, local government entities, and education groups.
This bill is opposed by business groups, led by the California Taxpayers Association, which argues, “At a time when California’s state budget is facing cost pressures, and the Legislature and administration are seeking to minimize new program costs, any duplicative program that creates new costs for an evaluation that already exists is not necessary.”
- Prior Legislation. AB 545 (Quirk), of the 2021-22 Legislative Session, would have requested the Regents of the University of California (UC) to perform a comprehensive assessment of major tax expenditures. AB 545 was held on the Senate Appropriations Committee’s suspense file.
SB 468 (Jackson), of the 2019-20 Legislative Session, would have established the California Tax Expenditure Review Board to assess major tax expenditures and make recommendations to the Legislature and requested the UC to perform a comprehensive assessment to present to the board. SB 468 was vetoed by Governor Newsom, who stated:
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 [DOF] 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.
Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081
Date of Hearing: June 15, 2026
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Mike Gipson, Chair
SBPCA Bill Id:SB 1349
Author:(Gonzalez) – As Amended Ver:June 8, 2026
Majority vote.
SENATE VOTE: 30-8
SUBJECT: Taxation: tax expenditures: Legislative Analyst's Office: assessment, report, and recommendation
SUMMARY: Requires the Legislative Analyst's Office (LAO) to comprehensively assess the "major tax expenditures" of the state, write and publish a report on each "major tax expenditure", and make a recommendation to the Legislature based on each report, as specified. Specifically, this bill:
- Contains the following legislative findings and declarations:
- California's publicly funded K-14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes;
- The Legislature has consistently advanced tax expenditures, including credits and sales and use tax (SUT) 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 which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar;
- Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-24, thousands of 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;
- 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;
- 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;
- 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;
- California has a number of major tax expenditures that have resulted in over $1 billion of foregone revenue in the last 10 fiscal years (FYs) which do not have an inoperative date nor a requirement for any metrics of efficacy; and,
- It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.
- Defines the term "major tax expenditure" to include all of the following:
- The water's-edge election allowed by Revenue and Taxation Code (R&TC) Section 25110;
- The credits relating to increasing research activities allowed by R&TC Sections 17052.12 and 23609;
- The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in R&TC Sections 18031 and 24911;
- The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by R&TC Sections 18031 and 18031.5 of the Personal Income Tax (PIT) Law and R&TC Sections 24941 and 24941.5 of the Corporation Tax (CT) Law;
- The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by R&TC Sections 17201 and 17201.1; and,
- The special apportionment of business income for qualified cable system operators pursuant to R&TC Section 25136.1.
- Provides that, as part of the comprehensive assessments, the LAO shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures.
- Requires the LAO to consider all of the following criteria when finalizing each report:
- 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;
- An analysis of the major tax expenditure's effect on the General Fund, including Proposition 98;
- An analysis of the major tax expenditure's effect on employment, wages, and the state's economy; and,
- Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
- Requires the LAO to complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually thereafter, until January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Government Code Section 9795.
- Requires the Senate Committee on Revenue and Taxation and this Committee to hold a joint public hearing on the first report submitted by August 15, 2028, and a joint public hearing on the two most recent reports submitted by each August 15 of the second year of the legislative session thereafter.
- Sunsets this bill's statutory provisions on January 1, 2033.
EXISTING LAW:
- Requires any bill that authorizes a tax expenditure to contain all of the following:
- Specific goals, purposes, and objectives that the tax expenditure will achieve;
- Detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets the goals, purposes, and objectives stated in the bill; and,
- Specified data collection requirements to enable the Legislature to determine whether the tax expenditure is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. (R&TC Section 41.)
- Specific goals, purposes, and objectives that the tax expenditure will achieve;
- Requires the Department of Finance (DOF) to provide an annual report to the Legislature on tax expenditures by no later than November 1 of each year. This report must include each of the following:
- A comprehensive list of tax expenditures exceeding $5,000,000 in annual cost;
- The statutory authority for each credit, deduction, exclusion, exemption, or any other tax benefit as provided by state law;
- 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;
- The sunset date of each credit, deduction, exclusion, exemption, or any other tax benefit as provided by state law, if applicable;
- A brief description of the beneficiaries of the credit, deduction, exclusion, exemption, or other tax benefit as provided by state law;
- An estimate or range of estimates for the state and local revenue loss for the current FY and the two subsequent FYs;
- For PIT expenditures, the number of taxpayers affected and returns filed, as applicable, and the cost to the state resulting from these PIT expenditures, for which data is readily available;
- For CT 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;
- A listing of any comparable federal tax benefit, if any; and,
- A description of any tax expenditure evaluation or compilation of information completed by any state agency since the last report made. (Government Code Section 13305(a).)
- Defines a "tax expenditure" as a credit, deduction, exclusion, exemption, or any other tax benefit as provided for by the state. (Government Code Section 13305(b).)
FISCAL EFFECT: This bill is keyed non-fiscal.
COMMENTS:
- The author has provided the following statement in support of this bill:
As California navigates a structural budget deficit compounded by the threat of federal HR-1 cuts, we have an obligation to scrutinize every dollar spent. While direct spending is heavily debated each year, the tax expenditures targeted by SB 1349 quietly drain billions from our revenues without any expiration dates or oversight to prove they actually work.
SB 1349 injects much-needed scrutiny into this fiscal vacuum by directing the Legislative Analyst's Office to independently review five tax expenditures to determine whether they are a cost-effective use of resources to achieve their goals, what their effect is on the state's economy and employment, and whether there are opportunities for improvement through reform or repeal. When our state faces impossible choices about what public services to cut, continuing to hand out billions in unexamined tax subsidies is a luxury we simply cannot afford. We must ensure our current tax code is achieving its goals, rather than just shifting the burden onto everyday Californians. By providing a clear, data-driven report, SB 1349 will help ensure that California is investing its resources most effectively.
- This bill is co-sponsored by the California Teachers Association, which notes:
The Department of Finance indicates that in 2025-26 there was a $94.15 billion loss in revenue to the General Fund from tax expenditures. Every dollar in lost revenue is approximately 40 cents taken from California's classrooms that could have amounted to smaller class sizes, better staffed schools, and more individualized support for students. Additionally, the loss of revenue affects the amount of funding available for critical public services like healthcare, food assistance programs, and affordable childcare services.
SB 1349 (Gonzalez) will require the Legislative Analyst's Office (LAO) to analyze major tax expenditures and include the extent to which it is a cost-effective use of resources and impacts to the General Fund and Proposition 98. The LAO will also identify opportunities to improve the effectiveness of each major tax expenditure and opportunities for cost savings.
At a time when we are faced with a structural deficit, California should examine tax expenditures to ensure that they are achieving their public policy objectives and making the best use of limited public dollars.
- This bill is supported by SEIU California, which notes the following:
This bill requires the Legislative Analyst's Office to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report.
When tax expenditures reduce the amount of tax collected but do not achieve its public policy objectives, it hurts working people and their families, like the ones SEIU represents. Tax expenditures impact the General Fund that supports critical social safety net programs, as well as Proposition 98 funds – the minimal annual funding level for TK-12 schools and community colleges. This bill will bring transparency and accountability to some of California's most costly tax incentives by creating a process for their analysis and public review.
- This bill is opposed by the California Chamber of Commerce, which notes:
While it is meritorious for the state to assess the effectiveness of tax policies and program expenditures, this measure would create significant uncertainty with respect to the future of the state's tax structure and would adversely affect California's ability to retain and attract jobs and investments. The threat of repealing tax incentives, given our state's already high cost of doing business, poses a significant barrier to jobs, investment, and the state's long-term economic growth. For example, the state's film and television production tax credit helps mitigate California's high costs, improving California's ability to keep this important industry's jobs and investments from being lured to other states. This credit would cease to be effective if the state signaled that it could be repealed prior to its scheduled sunset date based on subjective evaluation standards. Businesses engage in long-term planning, and a stable tax structure is an important factor for convincing them to stay in California.
- Committee Staff Comments:
- 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).
- 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.
- What would this bill do? This bill seeks to establish a process for the state to systematically review some of its largest tax expenditures. This bill would require the LAO to comprehensively assess a set of "major tax expenditures", and to make a recommendation to the Legislature based on each report. The LAO is charged with, among other things, identifying any savings that the Legislature can realize by reducing or limiting these specific tax expenditure programs. The LAO would be required to complete and publish its first report by October 15, 2027, and to complete and publish each subsequent report annually thereafter, until January 1, 2032. Finally, this bill would require the Senate Committee on Revenue and Taxation and this Committee to hold a joint public hearing on the first report by August 15, 2028, and a joint public hearing on the two most recent LAO reports by each August 15 of the second year of the legislative session thereafter. This bill's statutory provisions would thereafter sunset on January 1, 2033.
- The targeted tax expenditures: This bill identifies six major tax expenditures for review, ranging from the water's-edge election available to multinational taxpayers under the CT Law to the state's research credit allowed under R&TC Sections 17052.12 and 23609. Given this bill's stipulated schedule and sunset date, however, it appears the LAO would only have time to prepare a report on five of the six listed major tax expenditures. Committee staff is informed that the author wishes to grant LAO discretion regarding which five tax expenditures to report on, as well as the sequence of their assessment. To avoid confusion or ambiguity, however, the Committee and author may wish to make this discretion specific in the statutory language of the bill itself.
- Will additional reports and hearings be helpful? Members and legislative staff receive a significant number of reports each year, many mandated by statute. California's "Agency Reports" website lists 489 state agencies with reporting obligations. By way of example, the California Department of Tax and Fee Administration is charged with reporting on issues as wide-ranging as hazardous waste facilities to the total dollar amount of exemptions taken under the state's partial SUT exemption for manufacturing equipment. The state also prepares reports specifically examining the state's tax expenditure programs. Most notably, the DOF already prepares an annual report that comprehensively lists all tax expenditures exceeding $5 million in annual cost.
It should also be noted that this Committee has held multiple informational hearings on the state's tax expenditure programs. The most recent such hearing was held on February 22, 2023. As such, the Committee may wish to assess whether additional reporting on the state's tax expenditure programs would be beneficial to the policymaking process. On one hand, it is fair to note that a report and hearing focused on California's conformity to federal like-kind exchange rules may prove useful. It is less clear to Committee staff whether the same can be said for a hearing on the state's water's-edge election, given that this Committee just held a comprehensive joint hearing with the Senate on this topic in February of this year. This, of course, raises the larger question of whether legislative committees should have discretion to focus their limited time and resources on subjects their leadership considers worthy of review or whether such hearings – and their subject matter – should be dictated by statute.
- LAO constraints: This bill tasks the LAO with reviewing the identified major tax expenditures and reporting its findings to the Legislature. The LAO enjoys a stellar reputation for thoughtful and nonpartisan analysis. That being said, the LAO only has limited resources, which would be impacted by the extra workload necessitated by this bill. Specifically, LAO staff notes:
SB 1349 represents a significant increase in workload for our office and adds to the list of 11 reports on tax and economic topics we are required by current law to deliver over the next 4 years. While we likely can absorb the additional workload from SB 1349 with our existing staffing, adding this work to our regular work on the budget, revenue forecasting, and initiative and ballot measures will result in a very diminished capacity to serve the Legislature in other capacities, such as fulfilling member requests, providing technical assistance, and carrying out independent research. SB 1349 likely would fully saturate our office's existing capacity to perform tax expenditure analyses for the foreseeable future, meaning any future legislation that would give our office new reporting requirements would need to come with additional resources and staffing for our office. Due to Proposition 140, those additional resources would need to be taken from somewhere else in the Legislature's budget.
To this end, the Committee may wish to consider whether it would be beneficial to delay the due date of the LAO's first report to provide the office with additional lead-time.
- Data sharing: To provide meaningful reports, the LAO will almost certainly require information from the state's relevant tax administering agencies. As such, the Committee may wish to consider amendment language authorizing data sharing.
- Prior legislation:
- AB 545 (Quirk), of the 2021-22 Legislative Session, would have requested the Regents of the University of California to perform a comprehensive assessment of major tax expenditures, as defined. AB 545 (Quirk) was held by the Senate Committee on Appropriations.
- SB 468 (Jackson), of the 2019-20 Legislative Session, would have established in state government the California Tax Expenditure Review Board as an independent advisory body to comprehensively assess major tax expenditures, as defined. Governor Newsom vetoed SB 468 (Jackson), noting the following in his 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.
For these reasons, I am returning this bill without my signature.
- Late breaking amendments: To address some of the administrative considerations identified above, the author has agreed to accept amendments to do the following:
- Require the LAO to complete and publish its first of five reports on a major tax expenditure by January 1, 2028 (instead of October 15, 2027), and to complete and publish each subsequent report on a major tax expenditure annually thereafter, in a sequence of its choosing, until January 1, 2032, when its fifth and final report is due; and,
- Include data sharing authorization along the following lines:
- Late breaking amendments: To address some of the administrative considerations identified above, the author has agreed to accept amendments to do the following:
To the extent that the Legislative Analyst's Office needs access to taxpayer data and information, the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department shall ensure relevant anonymized taxpayer data is made available and shall ensure appropriate levels of data security and privacy protections are in place for transferred or sensitive data.
REGISTERED SUPPORT / OPPOSITION:
Support
American Federation of State, County and Municipal Employees, AFL-CIO (Co-sponsor)
California Teachers Association (Co-sponsor)
The Arc of California
California Association of School Business Officials
California Professional Firefighters
California School Boards Association
California School Employees Association, AFL-CIO
California Tax Reform Association
City of Thousand Oaks
Los Angeles Unified School District
SEIU California
UDW/AFSCME Local 3930
Opposition
California Chamber of Commerce
California Life Sciences
California Taxpayers Association
Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-4171 | SB 1349 |
THIRD READING
Bill No: SB 1349
Author: Gonzalez (D), et al.
Amended: 4/28/26
Vote: 21
SENATE REVENUE AND TAXATION COMMITTEE: 4-1, 4/8/26
AYES: McNerney, Ashby, Becker, Grayson
NOES: Alvarado-Gil
SENATE APPROPRIATIONS COMMITTEE: 5-2, 5/14/26
AYES: Cervantes, Cabaldon, Grayson, Richardson, Wahab
NOES: Seyarto, Dahle
SUBJECT: Taxation: tax expenditures: Legislative Analyst’s Office: assessment, report, and recommendation
SOURCE: American Federation of State, County, and Municipal Employees
California Teachers Association
DIGEST:
This bill directs the Legislative Analyst’s Office (LAO) to comprehensively assess the state’s major tax expenditures, as defined, issue a report, and make a recommendation to the Legislature.
ANALYSIS:
Existing law:
- Allows various income tax credits, deductions, exemptions, and exclusions, among them:
- The Research and Development Credit, calculated in partial conformity with federal law, that allows a credit against the Personal Income and Corporation Taxes for a taxpayer’s qualified research expenses incurred in California that exceed the base year amount, as defined, plus a percentage of the amount paid or incurred during the taxable year on research undertaken by a research consortium.
- Basis Step-Up on Inherited Property, in conformity with federal law, that “steps up” the basis of inherited property to fair market value as of the date of death under both the Personal Income and Corporation Taxes, so heirs do not pay taxes on gains from assets that appreciated in value when held by the decedent.
- Like-Kind Exchanges, in modified conformity with federal law, that defers the recognition of any gain or loss under both the Personal Income and Corporation Taxes on the exchange of property held for productive use in a trade or business or for investment, if that property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.
- Expensing of Research Expenses, in conformity with federal law, where taxpayers can elect to either deduct research and experimental expenditures under both the Personal Income and Corporation Taxes in full the year they were paid or incurred, or elect to capitalize and amortize them over at least 60 months. A taxpayer that did not expense or capitalize and amortize these expenditures had to treat the costs as chargeable to a capital account.
- Allows as an exception for qualified cable companies to the general requirement for multistate businesses to apportion net income to California for Corporation Tax purposes based on a factor equal to its California sales divided by its total sales. Qualified cable companies spending $250 million or more in California on certain expenditures can exclude half of their in-state sales when apportioning (Proposition 39, 2012).
- Permits taxpayers to either file on a worldwide combined reporting basis or to elect to calculate California income and activities on a water’s-edge basis. Generally, water’s-edge taxpayers may exclude income and apportionment factors of foreign-organized unitary affiliates that would otherwise be part of its unitary combined report, with some exceptions.
This bill:
- Directs the Legislative Analyst’s Office to comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report.
- Defines “major tax expenditure” to include:
- The Water’s Edge Election.
- The Research and Development Tax Credit.
- Basis Step-up on Inherited Property.
- Like-Kind exchanges.
- Expensing of Research Expenditures.
- Special apportionment for qualified cable companies.
- Requires LAO to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures as part of its assessments.
- Directs LAO to consider the following criteria when finalizing each report:
- 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.
- An analysis of the major tax expenditure’s effect on the General Fund, including Proposition 98.
- An analysis of the major tax expenditure’s effect on employment, wages, and the state’s economy.
- Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
- Requires LAO to complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, and thereafter, complete and publish on its internet website each subsequent report on a major tax expenditure annually, as determined by the office.
- Directs the Senate and Assembly Committees on Revenue and Taxation to hold a joint public hearing on the assessment by August 15 of the second year of the legislative session in each legislative session in which LAO completes a comprehensive assessment of a major tax expenditure.
Background
California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives 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 they would otherwise not do, but for the tax credit. The Department of Finance (DOF) is required to annually publish a list of tax expenditures, which currently total around $94.2 billion per year.
Many of the state’s tax expenditures that result in the most foregone revenue do not have sunset dates, some of which fully or partially conform with provisions of the Internal Revenue Code. However, many of California’s most significant tax expenditures do contain sunset dates, including, among others:
- The Television and Motion Picture Production Credit, administered by the California Film Commission, which DOF estimates results in $141 million in foregone revenue in 2023-24, growing to $463 million in 2027-28.
- The California Competes Tax Credit, administered by the California Competes Tax Credit Committee, which DOF estimates results in $6 million in foregone revenue in 2023-24, growing to $12 million in 2027-28. While the program is set to sunset after the 2027-28 fiscal year, Governor Newsom’s 2026-27 Proposed Budget would extend the program by five years.
- The State General Fund-only sales and use tax exemption on purchases of manufacturing equipment made by taxpayers within specific North American Industrial Classification System codes, capped at $200 million annually per taxpayer. In 2017, the Legislature expanded and extended this exemption until January 1, 2030, as part of legislation to extend the Global Warming Solutions Act.
While the Legislature has extended sunsets for several tax expenditures like those noted above, they occasionally sunset and are repealed. Last year, the New Employment Credit, which directed the Franchise Tax Board (FTB) to allocate credits for wages paid by taxpayers to qualified employees within areas that suffer from high levels of poverty and unemployment, sunset and 2025 was the last taxable year the credit could be claimed.
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. Additionally, FTB publishes several reports regarding specific tax credits.
Section 41. In 2014, Governor Brown signed SB 1335 (Leno, Chapter 845, Statutes of 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. The Legislature expanded Section 41 to include all tax expenditures under the Personal Income and Corporation Taxes, as well as sales and use tax exemptions (AB 263, Burke, Chapter 743, Statutes of 2019), but not PIT exclusions when there is no available data to collect (AB 3289, Committee on Revenue and Taxation, Chapter 124, Statutes of 2024).
FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No
According to the Senate Appropriations Committee, this bill would result in a cost pressure to the LAO to perform its required workload (General Fund). The LAO could likely absorb this work, but by doing so, it would be less able to serve the Legislature in other capacities, such as fulfilling member requests and providing technical assistance. The LAO’s funding comes the Legislature’s budget, which is capped by Proposition 140 (1990). Thus, to the extent the Legislature provides additional funding to the LAO to perform the duties required by the bill, less resources would be available for the remainder of its budget.
SUPPORT: (Verified 5/16/26)
American Federation of State, County and Municipal Employees, AFL-CIO (Co-Source)
California Teachers Association (Co-Source)
California Federation of Labor Unions, AFL-CIO
California Federation of Teachers
California Professional Firefighters
California School Employees Association
California State Association of Counties
California State Council of Service Employees International Union
City of Thousand Oaks
League of California Cities
Los Angeles Unified School District
One individual
OPPOSITION: (Verified 5/16/26)
California Chamber of Commerce
California Taxpayers Association
ARGUMENTS IN SUPPORT: According to the author, “California has over 100 tax expenditures that resulted in a $94 billion loss in general fund revenues in fiscal year 2025-26. Because programs established before 2014 lack modern performance standards, a 2016 State Auditor’s report found insufficient evidence that they are actually meeting their goals. This assessment of California’s largest corporate tax expenditures introduces long-overdue oversight into the use of taxpayer dollars. By providing a clear, data-driven report, SB 1349 will chart a path for California to invest its resources more effectively and accountably.”
ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “We are concerned that SB 1349 would create an unnecessary step in state government to report findings relating to critical business tax policies California has adopted to encourage businesses to locate and expand in California, duplicating existing evaluations conducted by the Department of Finance and others. At a time when California’s state budget is facing cost pressures, and the Legislature and administration are seeking to minimize new program costs, any duplicative program that creates new costs for an evaluation that already exists is not necessary. While it is meritorious for the state to assess the effectiveness of tax policies and program expenditures, this measure would create significant uncertainty with respect to the future of the state’s tax structure and would adversely affect California’s ability to retain and attract jobs and investments.”
Prepared by: Colin Grinnell / REV. & TAX. / (916) 651-4117
5/16/26 11:16:01
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SENATE COMMITTEE ON
Senator Sabrina Cervantes, Chair
2025 - 2026 Regular Session
SB 1349 (Gonzalez) - Taxation: tax expenditures: Legislative Analyst’s Office: assessment, report, and recommendation
Version: | Policy Vote: |
Urgency: | Mandate: |
Hearing Date: | Consultant: |
Bill Summary:
SB 1349 would require the Legislative Analyst’s Office (LAO) to report to the Legislature regarding specified tax expenditures (TEPs).
Fiscal Impact:
This bill would result in a cost pressure to the LAO to perform its required workload (General Fund). The LAO could likely absorb this work, but by doing so, it would be less able to serve the Legislature in other capacities, such as fulfilling member requests and providing technical assistance. The LAO’s funding comes the Legislature’s budget, which is capped by Proposition 140 (1990). Thus, to the extent the Legislature provides additional funding to the LAO to perform the duties required by the bill, less resources would be available for the remainder of its budget.
Background:
Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently exceed $94 billion annually.
Many of the State’s most significant TEPs contain sunset dates. One example is the Motion Picture Production Credit, administered by the California Film Commission. DOF estimates that the credit will result in $141 million in foregone revenue in 2023-24, growing to $463 million in 2027-28. Among other changes, last year the Legislature increased the annual authorization amount to $750 million.
Many of the state’s TEPs that result in the most foregone revenue, however, do not have sunset dates. Examples include the Personal Income Tax (PIT) exclusion for employer pension contributions (which DOF estimates results in $15 billion in foregone revenue in 2023-24, growing to $22 billion in 2027-28), the PIT deduction for mortgage interest ($3 billion), the SUT exemption for food products consumed at home ($5.5 billion state/$6.8 billion local), and the water’s edge election for Corporation Tax purposes (up to $4.5 billion).
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.
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.
Proposed Law:
This bill would do the following:
- Require the LAO to (1) comprehensively assess specified major tax expenditures, as defined, and (2) write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report.
- Require the LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require it to consider certain criteria when finalizing each report, including 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.
- Require the LAO to complete and publish on its internet website its first report by October 15, 2027, and to complete and publish each subsequent report on a major tax expenditure annually thereafter, as specified.
- Require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, in each legislative session in which a comprehensive assessment of a major tax expenditure is completed, to hold a joint public hearing, as specified.
Related Legislation:
- SB 468 (Jackson, 2019) would have created the California Tax Expenditure Review Board, which would have been tasked with determining the schedule for comprehensive assessments of major tax expenditure programs, to be conducted by a University of California research center. The bill was vetoed by the Governor.
- SB 956 (Jackson, 2020), was similar to SB 468, but was never heard in the Assembly.
Staff Comments:
This bill would result in a significant increase in LAO workload; specifically, it would add to the list of 11 reports on tax and economic topics required of it under current law over the next four years. As mentioned previously, the LAO indicates that it could likely absorb the bill’s requirements; however, adding them to its regular work on the budget, revenue forecasting, and initiative and ballot measures would diminish its capacity to serve the Legislature in other ways. The LAO further indicates that this bill would likely saturate its existing capacity to perform tax expenditure analyses for the foreseeable future, meaning any future legislation that would give the office new reporting requirements would require additional resources and staff.
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 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.
-- END --
SENATE COMMITTEE ON REVENUE AND TAXATION
Senator Jerry McNerney, Chair
2025 - 2026 Regular
Bill No: | SB 1349 | Hearing Date: | 4/8/26 |
Author: | Gonzalez | Tax Levy: | No |
Version: | 4/6/26 | Fiscal: | Yes |
Consultant: | Grinnell | ||
Taxation: tax expenditures: California Tax Expenditure Review Board
Directs LAO to write and publish a report that comprehensively assesses the state’s major tax expenditures and make recommendations to the Legislature based on the report.
Background
Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives 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 they would otherwise not do, but for the tax credit. The Department of Finance (DOF) is required to annually publish a list of tax expenditures, which currently total around $94.2 billion per year.[1]
Many of California’s most significant tax expenditures contain sunset dates, including, among others:
- The Television and Motion Picture Production Credit, administered by the California Film Commission, which DOF estimates results in $141 million in foregone revenue in 2023-24, growing to $463 million in 2027-28. The Legislature increased the authorization amount from $330 million to $750 million last year, among other changes (AB 1138, Zbur, and SB 132, Committee on Budget & Fiscal Review).
- The California Competes Tax Credit, administered by the California Competes Tax Credit Committee, which DOF estimates results in $6 million in foregone revenue in 2023-24, growing to $12 million in 2027-28. While the program is set to sunset after the 2027-28 fiscal year, both Governor Newsom’s 2026-27 Proposed Budget and SB 1120 (McNerney) would extend the program by five years.
- The State General Fund-only sales and use tax exemption on purchases of manufacturing equipment made by taxpayers within specific North American Industrial Classification System codes, capped at $200 million annually per taxpayer. In 2017, the Legislature expanded and extended this exemption until January 1, 2030, as part of legislation to extend the Global Warming Solutions Act (AB 398, E. Garcia, 2017).
While the Legislature has extended sunsets for several tax expenditures like those noted above, they occasionally sunset and are repealed. Last year, the New Employment Credit, which directed the Franchise Tax Board (FTB) to allocate credits for wages paid by taxpayers to qualified employees within areas that suffer from high levels of poverty and unemployment, sunset and 2025 was the last taxable year the credit could be claimed. However, AB 2205 (Quirk-Silva), currently pending in the Assembly, would reinstate the credit.
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. Additionally, FTB publishes several reports regarding specific tax credits.[2]
Many of the state’s tax expenditures that result in the most foregone revenue do not have sunset dates, some of which fully or partially conform with provisions of the Internal Revenue Code:
- Personal Income Tax (PIT) exclusion for employer pension contributions, which DOF estimates results in $15 billion in foregone revenue in 2023-24, growing to $22 billion in 2027-28.
- PIT exclusion for employer contributions to health plans ($9.5 to $10 billion).
- PIT exclusion for social security benefits ($5 to $6 billion).
- Sales tax exemption for food products ($5 to $5.5 billion state/$6.2 to $6.8 billion local).
- Basis step-up on inherited property ($4.5 to $5.5 billion).
- PIT exclusion for capital gains for primary place of residence ($4 to $5 billion).
- PIT deduction for charitable contributions ($3.5 to $4.1 billion).
- Water’s edge election for Corporation Tax purposes ($3.4 to $4.5 billion).[3]
- Sales tax exemption for prescription drugs ($2.5 billion state/$3.1 billion local).
- PIT deduction for mortgage interest ($3 billion).
- PIT deduction for real estate, property, and other taxes ($3 billion).
- Research and Development Credit under PIT and Corporation Tax ($2.2 - $3.4 billion).
- Like-kind exchanges under PIT and Corporation Tax ($1.5 billion).
Credit Limitation. In 2024, the Legislature limited the total of all business credits, with some exceptions, including credit carry forwards, to $5,000,000 in the 2024, 2025, and 2026 taxable years, unless the Director of Finance determines that General Fund money over the multiyear forecast is sufficient without the revenue impact of the net operating loss suspension and credit limitation (SB 167 and SB 175, Committee on Budget & Fiscal Review). Taxpayers can make an irrevocable election to receive an annual refundable credit claimed in future tax years for business credits equal to credit amounts not claimed due to the limitation.
Section 41. In 2014, Governor Brown signed SB 1335 (Leno), 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. The Legislature expanded Section 41 to include all tax expenditures under the Personal Income and Corporation Taxes, as well as sales and use tax exemptions (AB 263, Burke, 2019), but not PIT exclusions when there is no available data to collect (AB 3289, Committee on Revenue and Taxation, 2024).
With the state’s ongoing fiscal challenges squeezing resources available to fund public education, among other programs, advocates for teachers and public employees want LAO to review the state’s major tax expenditures and make recommendations for changes.
Proposed Law
Senate Bill 1349 directs LAO to write and publish a report that comprehensively assesses the state’s major tax expenditures and make recommendations to the Legislature based on the report by January 1, 2029. As part of the comprehensive assessment, LAO must identify any savings that the Legislature can reduce or eliminate from the major tax expenditures, and can consider the following criteria when finalizing the report:
- General Fund impact.
- LAO’s assessment of whether modification or repeal of the major tax expenditure would provide the most positive impacts on the General Fund with the least negative economic, social, or environmental impacts.
The bill directs any other state agency to assist LAO with completing its comprehensive assessments of major tax expenditures to the maximum degree practicable.
The measure provides that the scope of each comprehensive assessment must include, to the extent possible:
- A description of the legislative intent for each tax expenditure, if the act adding or amending the tax expenditure contains legislative findings and declarations of that intent or that legislative intent is otherwise expressed or specified by that act.
- A brief description of the beneficiaries of the tax expenditure, 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 any 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 of California.
- The total net General Fund money lost due to the tax expenditure, including the impact that the shift in resources has on other General Fund programs.
- The total reduction in the amount of General Fund proceeds from taxes for purposes of the Proposition 98 guarantee due to the tax expenditure, including the impact the shift in resources has on educational programs.
- The potential environmental impacts of the tax expenditure, if any.
- A long-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 all of the following additional information:
- Whether the jobs created were short- or long-term positions, as well as the average salary and benefits provided for the jobs created.
- The number of jobs lost or reduced in areas impacted by the tax expenditure, or whether jobs were shifted to other sectors.
- Aggregate demographics on gender, race, ethnicity, and age for the jobs created.
LAO’s recommendation must include the following:
- The extent to which each major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.
- An analysis of each major tax expenditure’s effect on the General Fund.
- An analysis of each major tax expenditure’s effect on employment, wages, and the state’s economy.
- Whether opportunities exist to improve the effectiveness of each major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.
The bill defines “major tax expenditure” using the same definition as the DOF tax expenditure report, with the following modifications:
- The amount of foregone revenue resulting from the tax expenditure is equal to or greater than one billion dollars over the previous 10 fiscal years.
- Does not contain either a repeal or inoperative date, or a requirement to report any metrics of efficacy.
The bill then excludes the following from the definition of “major tax expenditure”:
- Sales and use tax exemptions for:
- Gas, electricity, and water, including steam and geothermal steam, brines, and heat, when delivered to consumers through mains, lines, or pipes.
- Liquefied petroleum gas, delivered to a qualified residence by the seller, that is sold for household use in the qualified residence, or liquefied petroleum gas that is purchased for use by a qualified person to be used in producing and harvesting agricultural products.
- Water, when sold to an individual in bulk quantities of 50 gallons or more, for general household use in his or her residence if the residence is located in an area not serviced by mains, lines, or pipes.
- Exhaust steam, waste steam, heat, or resultant energy, produced in connection with cogeneration technology.
- Food products for human consumption.
- Prescription medication.
- Hemodialysis products supplied to a patient on order of a licensed physician and surgeon.
- Is not solely allowed against the Personal Income Tax.
- Public safety officer death benefits.
- Tax exempt status for non-profit organizations.
- Charitable contribution deductions.
- Payments from life insurance contracts, endowments, or other annuity contracts.
LAO must submit the report to the Assembly and Senate Committees on Revenue & Taxation, and publish the report on its website. The bill requires the Committees to hold a joint public hearing on the report by August 15th of the second year of the Legislative session. The bill also makes legislative findings and declarations supporting its purposes. The bill makes its provisions inoperative on the date six months following the joint hearing of the Assembly and Senate Revenue & Taxation Committees and repeals its provisions the following January 1st.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill. According to the author, “California has over 100 tax expenditures that resulted in a $94 billion loss in general fund revenues in fiscal year 2025-26. Because programs established before 2014 lack modern performance standards, a 2016 State Auditor’s report found insufficient evidence that they are actually meeting their goals. This assessment of California’s largest corporate tax expenditures introduces long-overdue oversight into the use of taxpayer dollars. By providing a clear, data-driven report, SB 1349 will chart a path for California to invest its resources more effectively and accountably.”
2. Necessary? California does not lack publicly available aggregate information about its tax expenditures. In addition to the reports referenced above, the California Department of Tax and Fee Administration (CDTFA) issues Publication 61, which details all sales and use tax exemptions. In its recent report “Comparing Options to Raise and Lower Taxes,” LAO included several options to modify current tax expenditures, among other changes to state taxation.[4] The Legislature has already required LAO to complete eleven reports on recently enacted bills by the end of the decade. SB 1349 would place additional demands on LAO to produce a report where plenty of publicly available information already exists, and which LAO may not be able to complete with its current resources by the bill’s deadline.
3. Tax expenditure reviews. In June 2017, the Pew Charitable Trusts issued its report on “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 it was 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”. The report concluded that if California adopted oversight methods used by other states, it would improve the effectiveness of its current and future tax expenditures, provide the Legislature with more information, and better account for 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.
4. Being specific. Applying SB 1349’s definition of “major tax expenditure,” LAO’s assessment would seem to include the following tax expenditures for review:
- The Water’s Edge Election.
- Research and Development Credit.
- Cable Companies Apportionment Exclusion.
- Basis step-up on inherited property.
- Like-Kind Exchanges.
- Sales and Use Tax exemptions for:
- Animal Life, Feed, Seeds, Plants, and Fertilizer; as well as Drugs and Medicines administered to animals.
- Candy, Confectionery, Snack Foods, and Bottled Water.
- Meals Furnished by Institutions.
- Farm Equipment and Machinery.
- Fuel Sold to Common Carriers Exemption.
However, both the Cable Company Apportionment Exclusion and the Candy, Confectionary, Snack Foods, and Bottled Water exemptions were added by voter initiative (Proposition 39, 2012, and Proposition 163, 1992, respectively), and would likely require voter approval to amend or repeal.
5. The more things change. According to Stanley Surrey and Paul McDaniel’s “Tax Expenditures,” the United States Department of the Treasury first published a tax expenditure budget in 1968. The Congressional Budget Act of 1974 required that all future budgets detail the tax expenditure concept and provide a detailed account of federal tax expenditures in the federal budget. In 1976, Congress reduced tax expenditures as part of the Tax Reform Act. Soon after, President Jimmy Carter urged the Treasury to recommend whether tax expenditures could be repealed to reduce taxes overall, and Congress considered sunset reviews and statutory caps on federal spending. Currently, the Joint Committee on Taxation estimates that tax expenditures resulted in $1.8 trillion less federal revenue in 2024 – an amount equal to 6% of the national gross domestic product, or almost 40% of all federal annual revenues.
6. 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.
7. Related legislation, part one. In 2019, the Legislature approved, but Governor Newsom vetoed, SB 468 (Jackson), which would have created the California Tax Expenditure Review Board. The Board would have been tasked with determining the schedule for comprehensive assessments of major tax expenditure programs, which were to be conducted by a University of California research center. The Governor stated:
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. …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.
The Senate approved a very similar measure in 2020, SB 956 (Jackson), which was never heard in the Assembly.
8. Related legislation, part two. As noted above, there is no lack of aggregate data regarding the state’s tax expenditures. However, taxpayer confidentiality laws bar tax agencies from disclosing any taxpayer-specific information that could be used to assess how specific companies and industries avail themselves of tax expenditures. SB 972 (Skinner) would have pierced those laws to direct FTB to compile a list of all taxpayers subject to the Corporation Tax with gross receipts of $5 billion or more for the taxable year reported on a return submitted in the previous calendar year, its annual gross receipts, and the amount of credits it claimed, among other information. FTB would send the information to legislative tax committees. However, Governor Newsom vetoed that measure as well, stating:
This bill would require the Franchise Tax Board (FTB) to provide certain information about corporate tax filings to two legislative committees.
This bill is unnecessary, as current law already authorizes the FTB, upon request, to disclose taxpayer data to legislative committees. The committee, its officers and employees are required to maintain the confidentiality of the information provided.
I am not persuaded that enactment of this bill would provide additional value to future policy deliberations
10. Technical. Committee Staff recommends the following technical amendment:
- In new Revenue & Taxation Code 43(b), replace “reduce or eliminate” with “realize by reducing or limiting”.
Support and Opposition
(4/6/26)
Support: California Teachers Association (Co-Sponsor)
American Federation of State, County and Municipal Employees, AFL-CIO
California Federation of Labor Unions, AFL-CIO
California State Association of Counties
California State Council of Service Employees International Union
League of California Cities
One Individual
Opposition: California Taxpayers Association
-- END --
https://dof.ca.gov/media/docs/forecasting/revenue-and-taxation/tax-expenditure-reports/2025-26-Tax-Expenditure-Report.pdf ↑
https://www.ftb.ca.gov/about-ftb/data-reports-plans/index.html ↑
The Committee held a joint information hearing with the Assembly Revenue & Taxation Committee regarding the water’s edge election on February 11, 2026. Agenda and hearing materials can be found here: https://srev.senate.ca.gov/2023-24-hearings/2026-informationaloversight-hearings ↑
https://lao.ca.gov/reports/2026/5170/Comparing_Options_to_Raise_and_Lower_Taxes_032426.pdf ↑
Discussed in Hearing
1MIN
Senate Floor
2MIN
Senate Floor
3MIN
Assembly Floor
6MIN
Assembly Standing Committee on Revenue and Taxation
2MIN
Senate Floor
12MIN
Senate Standing Committee on Revenue and Taxation
Bill Author
