Senate Budget and Fiscal Review Subcommittee No. 4 on State Administration and General Government

All right. Committee will be in order. Good morning. As we continue to take some precautions to manage the ongoing COVID-19 risk, the Senate continues to welcome the public and has provided access to both in person and teleconference participation for public comment.

For individuals wishing to provide public comment via teleconference service, toll free number and access code is posted on our Committee website. It will be displayed on the screen and I will announce it again now. Today's participant number is (877) 226-8163 and the access code is 718778.

As would be expected, I will maintain decorum during the hearing, as is customary, and any individual who's disruptive may be removed from the remote meeting service or have their connections muted. We're holding our Committee hearing in the State Capitol room 113 and ask all Members of the Committee to be present so that we can establish a quorum. Those providing testimony before the Committee today are also participating remotely.

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Please select the unmute before you begin speaking. Our IT personnel will put you back on mute when you are completed your testimony. Once you're recognized to speak, please make sure you can be seen on the screen, state your name for the record, and then you are ready to address the Committee.

To allow public access, we have admitted Members of the public into the hearing room in person, and we'll be using teleconference surface for those other individuals who wish testify today. Public comment will be heard after all discussion items have been taken up and presented. So at this point, the Committee will take up the items for discussion, which is composed of issues four through 17.

And first we'll go to the Department of Tax and Fee Administration if you're ready to present. But before we do that, welcome. Let's establish a quorum.

Thank you. All right. Tax and fee. Are we ready to present?

[Roll call] We have a quorum.

Yes, we are.

All right. We will take up issue number four, centralized revenue opportunity system, maintenance and operations. Please proceed.

Okay. Hi. Good morning. I'm Nick Maduros. I'm the Director of the California Department of Tax and Fee Administration. I was prepared to say just a few words of overview, but let me turn it over to our CFO and we can get straight to the BCPs if you'd like. Jason?

I apologize. I do understand you are prepared to give a brief overview, and feel free. Please feel free if you're inclined to do so. Before we take the item.

Well, I'll just take one brief minute, Mr. Chairman, just to introduce the Department. We administer 39 different tax and fee programs for the state of California and for cities and counties, including two new programs this year, one of which I know is of particular interest to you, the lithium extraction excise tax. And then as well, new this year is the nine eight eight surcharge to support mental health services in the state of California.

Last fiscal year, we brought in or administered slightly more than $90 billion in tax revenue. Our largest program is the sales and use tax for the state, which is actually three different taxes. One is the state program to support cities and counties throughout the state.

Sales and use tax revenue this fiscal year is actually up for fourth quarter of a calendar year. 2022 revenue is so far up a bit over 5% over the same period for last year. So that is good news.

We've had a strong focus on efficiency at CDTFA over the past number of years, we've slashed processing times by up to 90%, eliminated backlog, some of which dated back decades, grew year over year, collections last year by 25%, which is a fantastic effort by our team. I want to give a shout out to them. And we've cut the cost of operations per dollar of revenue, which is how we try to track our effectiveness by almost a quarter over three years.

Anyway, that's a bit of what we're doing. We're happy to answer any questions. We know taxes can be complicated, so we're here to serve.

And with that, I will turn it over to our chief financial officer, Jason Mallet.

Great. Thank you very much, Nick. And thank you, Chair Padilla and esteemed Committee Members. So the first request we have is on CROS.

So a little bit of background. The Centralized Revenue Opportunity System or CROS is our department's tax collections and distributions' IT system.

It encompasses all 39 tax programs that Nick mentioned that generate over $91 billion a year. Our request is for $8.9 million for fiscal year 23-24 and 24-25. The 8.9 million is composed of three buckets.

The first is 5.3 for maintenance and operations, 2.75 million for the software license, and 850,000 for operating expenditures, primarily the cloud and rent for the Fast Enterprises developers. The rationale for request is that CROS is a proprietary software that requires ongoing operations and maintenance to onboard new legislation and also maintain and customize reporting for existing legislation. And with that, I'd like to open it up for questions.

Any comment from DOF?

Good morning. Derk Symons, Department of Finance. We have no additional comments at this time. Thank you.

How about LAO?

Seth Kerstein, Legislative Analyst's Office. We have no concerns with the proposal.

Thank you. We'll bring it back to the committee. I have no questions.

Do Members have questions?

Just one question. I probably won't ask this. What happens if money is not allocated in the budget? What's the consequence.

Well, that would put additional pressure on state staff. I mean, GenTax, which is across as part of the GenTax software, it is our de facto tax operating system. It's used by 35 states in the country as well as a bunch of other countries.

And so we really do rely on that. If the proposal weren't to be approved, the range of outcomes in terms of managing new legislation and refining our reporting, it would put some of that at risk. So having a proprietary software has pros and cons.

On the plus side, it's working well for us and we feel like we're getting great value. On the opposite side, as with any major software, enterprise, resource program, things of that nature, we do rely on this to collect the $91 billion per year.

Thank you. Mr. Chair, one comment, general comment that I'd have not with regard to this particular item, but probably for every presentation we have, it would work so much better if we had testimony present here. I think that we've become too used to having remote testimony.

All of these folks are short walking distance to here and it's really kind of difficult to understand them. Their lips don't coincide with the words that are coming out of them. And I really hope that our future meetings in all committees will be in person testimony.

Thank you, Senator. And just thank you for triggering that information for the Members and the participants from the agencies and members of the public. The consensus of the Subcommittee chairs is just that.

And my understanding is, because of the shortness of time we proceeded, as have we have been for this week's Subcommittee hearing. But in the future, we will be having presenters in person. Thank you, Senator. Senator Caballero.

Thank you for that and I do appreciate the comment. And I second it, or third it, sounded like everyone was in agreement. I don't have a question on this particular item.

I just wanted to make sure that I didn't lose the thought that I had when I heard the overview, which is that I was really very happy to hear about the efficiency measures that have been undertaken over the past year and in particular eliminating the backlog and increasing revenue by 20-25%. That to me says that you're going in the right direction.

Backlogs are a perennial problem in most of our departments, and the ability to get caught up is great because then we won't hear complaints from people that have pending issues that haven't been resolved. So I want to make sure that I'm recognizing good work when I see it. And I appreciate the update.

You were going to skip over it, but I think it's really important that you let us know. So I appreciate that.

Thank you, Senator. Appreciate that. That item will be held open. We'll take issue to item number five, California Healthcare Research and Prevention Tobacco Tax Act of 2016, Prop. 56.

Great. Thank you. So, just as background, Prop. 56 raised the cigarette and tobacco tax from eighty seven cents a pack to $2.87 per pack, which generated about $1 billion of incremental revenues for the state. Last year, our tobacco programs together funded just under $2 billion.

Our request is for two and a half million in fiscal year 23-24 and ongoing to continue 16 enforcement positions. The rationale is that originally we had requested limited term funding for the positions because at the time the workload wasn't known. Now that we know the workload, we are requesting permanent funding for these 16 enforcement positions.

With that, I would like to answer any questions.

Thank you. Is there any comment from DOF?

We also have no additional comments on this item. Thank you.

Thank you. LAO?

Seth Kerstein, Legislative Analyst Office. We don't have any concerns with the proposal.

Thank you. We'll bring it back to the committee. There are no questions from the Chair.

Are there questions from Members? Senator Niello?

So, if I understand this correctly, there's 19 positions being requested. 16 are needed, but the other three will be absorbed by the Department, I guess without any budget increase. Do I understand that correctly?

Yes, sir, that that is correct. Initially, we had requested 19 positions for limited term, and now that the workload is known, we can absorb the three audit positions within our other tobacco and tax programs. I just would like to also mention and I'm joined by Harry Lucho, our acting Director of Field Operations.

Part of the reason why we're able to absorb these additional three positions is that there was a reorganization where some of our auditor teams moved from the Investigations Bureau to the Field Operations, and by consolidating that we're able to pool those resources.

So, would it be possible then to request 13, absorb three of the 16 instead?

No, sir. The three additional positions is bridged by our original request a couple of years ago for 19 positions and our current request for 16. So the three positions that are being absorbed is already reflected in this request.

Okay. And is the funding of this program, is it fungible? Can it be utilized by the General Fund or is it restricted?

This is special tax funding.

I understand that, but can it be utilized by the General Fund?

Senator Niello, Seth Kerstein with the LAO. Proposition 56 prescribed pretty specifically how the revenue would be allocated. So there aren't a whole lot of avenues to provide General Fund relief using this fund.

Thank you.

Yeah. I believe perhaps ten cents per pack is General Fund.

Thank you. Any further questions from the Members? Thank you. We'll move on to issue six, lithium extraction and geothermal development excise tax.

Thank you. So, as background, a large deposit of lithium, which is a critical component in lithium-ion batteries, was discovered in the Salton Sea area. SB 125 supports lithium and geothermal extraction facilities.

It also imposes a volume based excise tax which the CDTFA is responsible for collecting and administering. So our request is to implement the new lithium excise tax. We're requesting $249,000 in fiscal year 23-24, ratcheting down to 145,000 in 24-25 and ongoing.

The funding will be from the new Lithium Extraction Excise Tax Fund and will enable the Department to conduct outreach and education to the public and taxpayers, data collection and accounting and website and system design. And with that, we'd love to field any questions?

All right. Are there comments from the Department of Finance?

No, we have no additional comments. Thank you.

All right. How about LAO?

Seth Kerstein with the LAO, we do not have concerns with this proposal.

All right, we'll bring it back to the committee. Senator Caballero?

Thank you very much. I just want to make sure that the expenditure is consistent with what was proposed when this Bill came up so that we have an understanding of exactly what the cost is going to be and what the revenue is going to be used for. I think a lot of times, the cost ends up exceeding what is projected either by the revenue or by Department of Finance or LAO. So if, in fact, it was part of what everybody assumed would be an expenditure, it would be helpful to know that in the future.

Thank you, Senator. It sure will. I have a comment as well, and a concern as well as the timeliness and the evolution of the demand side of this industry and the types of investments that are being made and the willingness of the state to be a good structural partner and provide incentives is changing rapidly and changing every day. And I would really urge the sort of review on the review that's going to take place, that we accelerate that sooner rather than later.

Because I am not entirely convinced that the particular structure here per metric ton given a lot of the factors that rapidly change in this industry and the nature of the level of certainty or not, for folks who are investing on the ground there is changing rapidly. That, in fact, it actually produces a material benefit. And I'm concerned that there are, in fact, folks who are willing to make big investments in California to bring investment infrastructure production, here in the state are looking closely at this.

And I think that makes the timeliness of any evaluation that we make as a state all the more acute and important. And I would like to see that process accelerated because we may in fact need to be nimble. We may need to be changing the structure that we decide upon for this so that we can provide an actual benefit in a way that is consistent with what's intended here.

So I don't know if there's some response to that on the timeline of that review or other potential possibilities, but I wanted to put that on the record. Is there any comment or response?

I just wanted to share with you that yes, definitely. The tax structure here is something that we're investigating along with a couple of the departments. And as you said, this is very much a blue sky program with highly uncertain demand and supply characteristics.

Our research and statistics team has connected with the conservation department's scientists and geologists. I think the report is due at the end of this calendar year, if I'm not mistaken. And I know we've started to work on that.

And I think if we get the right people in the room, we should be able to move this along more quickly because there are a number of considerations to a volume versus price based tax.

And I realize that you don't have all of the information in front of you at today's hearing, but it would be important to get back to the committee with respect to specifics around what an accelerated timeline could look like because I think that would be most helpful.

Absolutely, Chair Padilla. We will talk internally and with our sister departments and come back to you with a timeline and how fast it can be moved forward.

All right, thank you. Anything else from the committee? Thank you. This item will be held open. That will bring us to the Franchise Tax Board and issue item number seven, Enterprise Data and Revenue Project.

Thank you and good morning, Chair Padilla and esteemed Members. My name is Jeanne Harriman with the Franchise Tax Board, and I'm here today with Toy Wong to present FTB's BCPs. So issue number seven is FTB's BCP supporting the enterprise data to Revenue Phase Two Project, the start of fiscal year 23-24 will see the FTB entering into the third year of the project.

This year's proposal requests an augmentation of 135 million and includes funding for 41 permanent positions, 31 limited term positions. The request also includes 116.5 million for payment to the solution partners for their work. As the project continues, we will continue to build on the foundations of the EDR Project One, or Phase One Project for centralizing technology solutions supporting key business functions.

EDR Two builds on this platform by expanding enterprise case management and modeling services for audit, filing enforcement, and accounts receivable functions that we do, as well as expanding the ever important customer service tools, including the taxpayer folder externally known as MyFTB. Overall, the project is going well, and collaboration between FTB and our solution partners remain strong. We are communicating and working well together, and as issues present, we are thankful for the teamwork to resolve these issues.

As a result, to date, the project is within scope, budget and schedule. For the third year, the BCP requests project work resources to support the project work associated with case management modeling, website enhancements focused on self service tools, enhanced data capture, training, data conversion and management, as well as oversight and functions such as the IV and V, independent verification and validation, quality assurance and the independent security assessment necessary for project. Following the statewide process established to support funding for larger projects, an annual BCP is required for new costs related to the current year, much like you do see displayed in our current BCP.

However, FTB is using a just in time approach to requesting resources and across the years you can see that we are asking for like resources across the years, even though the BCP only includes the current year resources. For full transparency, FTP has noted these ongoing limited term or one time costs within the body of the BCP narrative, as well as a notation on the workload measure document included with the BCP. One final note for transparency is to recognize the two provisional languages in our budget that support the EDR Two Project.

FTB's provisional language allows for the carryover of any appropriation associated with compensation that remains unused in any fiscal year and will allow for that to be carried over to the next fiscal year. Additional language also supports the funding and use of a contingency fund supporting the EDR Two Project that allows for a set level of funding never to exceed 5% of the contract amount to cover costs associated with unplanned events and work efforts, but which are critical to the successful implementation of the EDR Two Project. Thank you for your time and support today and happy to answer any questions you may have.

Thank you very much. Any comments from the Department of Finance?

Good morning, Derk Symons, Department of Finance We have no additional comments on this item. Thank you.

Thank you. From the LAO?

Hi, good morning. Brian Mueller from the LAO. We don't have any issues to raise on this item.

Thank you. We'll bring it back to the committee. The Chair has no comments, other Members questions or comments. Senator Niello?

I just want to clarify this, phase one and phase two is completed and this is funding to complete phase three. Or is this still on phase two?

Good question. Thank you for that. So phase one of the project and this is a 30 year effort and we're in phase two right now.

How many year effort?

A 30 year effort from phase one, two and three. And we are in year three of the phase two effort. So phase one went from 2011 to 2016 and then we immediately began planning for this current phase.

And as noted, this is for year three of phase two. Phase three is still several years out.

Okay, so I'll ask a similar question that I did earlier. What if this funding request is not included in the budget.

So, I would say challenges will present, right? We under contractual obligation to do this with the vendor.

And the biggest portion of the request that is pending before you is compensation for that vendor. So certainly litigation and legal issues would likely arise if it was not incorporated into FTP's budget. So that manages the O and E side of the equation.

The resources that are requested. Again, we're usually trying to be very judicious about the resources and only ask for other ones. So these resources requested are really what we need to make sure that we make and match our commitment to get this work done, so the vendor can get their work done.

So there presents that jeopardy as well that FTB won't be able, I'll just say keep up with the vendor without these additional resources because there is a lot of new work coming in associated with this project and that's what these resources are for. The other thing that I would mention that is very critical is the vast majority of the goals of this project are associated with managing end of life issues associated with FTB's compliance systems, which generate for almost 6 billion a year for the General Fund. And so the inability to recognize and overcome those end of life issues would present substantial jeopardy as well for FCB in the state, which I think is worth mentioning as well.

Thank you. Thank you, Senator. Senator Caballero.

Thank you, Mr. Chair. I just want to say that I'm very familiar with this technology project, having been having oversight of FTB as part of my duties in the Administration. And this is a really good example of a tech project that has met all of the objectives that were set by FTB.

So I want to just say that the FTB has done an excellent job. We need to recognize when technology projects go well. And I just wanted to say job well done.

So I appreciate your comments today. The end of life discussion was the end of life of the technology, not anybody in the Department, just so we're clear. These are legacy operations that are no longer functioning to the highest capacity.

And FTB is being modest because they brought in significant revenue, because they've had the ability now to go after and to know individuals that are not paying what they should be paying in taxes. So, appreciate that the update, and thank you for a job well done.

Thank you for the kind words.

I would echo that. Thank you, Senator. This item will be held open if there are no further questions or comments from Members. It'll take us to issue eight, technology expansion for business entities refundable credit.

Good morning. My name is Toy Wong and I'm covering issue eight today. As you mentioned, technology expansion for business entities refundable credit.

This proposal requests 4.5 million and two two-year limited term and five permanent positions starting in fiscal year 23-24 to make the necessary changes to our tax systems in order to support refundable credits for business entities. Currently, our systems cannot refund any dollars that haven't been paid in, and the system limitation really constraints our ability to implement legislative proposals seeking to provide refundable tax credits to assist businesses in overcoming their challenges. The resources requested will enable FTB to make the extensive, complex and truly foundational system changes that are necessary to support any refundable credits for businesses in the future.

The primary system that's requiring modifications is written in COBOL and FTB has limited resources with this skill set. In addition, our systems are highly integrated and complex. So to ensure a successful implementation and without risking or impacting our core business of processing tax returns, FTB is seeking vendor support for this change.

Of the 4.5 million requested in this proposal, 3.4 million is for one time vendor costs. Also, please note the augmentation would allow FTB to implement refundable business credits in general as of January 1 of 2025. However, any specific credit that needs to be implemented will require additional technical and business resources.

With that, happy to take any questions you may have.

Thank you very much. Any comments from the Department of Finance?

Derk Symons, Department of Finance. I have no concerns with this request. Thank you.

Thank you. LAO?

Yeah, Brian Mueller from the LAO. I just wanted to add a little bit more detail on the last point there about this allowing FTB to implement refundable credits in general. And just to kind of foreshadow a little bit on issue 11, where we will be discussing refundability of the film tax credit.

As we understand through discussions with FTB, there will be some additional administrative costs that would be associated with implementing that for the film tax credit in particular. So just to highlight that for your consideration.

Thank you very much. We'll bring it back to the committee. There are no questions from the Chair.

Are there questions or comments from Members? Senator Niello.

A clarification. This is, at least in part, funding a capability that is currently not allowed in law. Am I correct on that?

Yes, that is correct. This is in preparation for any desired credit in the future.

So we don't know whether we're going to need it or not.

Absolutely true. The reason we did put forth a proposal is over the last legislative session, we did see a desire to implement business credits, refundable credits specifically. However, our system currently doesn't allow us to react to that in a timely fashion. So this proposal was put forth to allow for that flexibility should you decide on it in the future.

But it is a presumption of what the Legislature is likely to do, though it hasn't done it yet?

Yes, sir.

I would just, you know, to add, I mean, I think it's it's typical there's often and those of us in the business of government, we get it coming both ways. If we are reactive, there are concerns. If we are prospective, there are concerns.

I think it's important as I review the information on this matter, certainly the ability to respond to shifting to more refundable credits in a timely fashion has a direct and relevant impact on the businesses seeking to capitalize on that. And regardless of whether there are new policy actions in the pending term or in the near future, it's pretty clear that the infrastructure needs to be able to be adjusted to accommodate that. And I think it's reasonable to anticipate that to some degree.

Although my colleagues point is well taken, there hasn't been action. But I just wanted to make that comment. Senator Niello.

And that's a legitimate point and I will grant it. But refundable tax credits means that you are granting tax credits to entities that aren't making money. And to the extent I am all for business development, my career in and out of government has been that, including venture funding.

But to allow credits, I think it's going to be really important to assess the return of allowing credits to businesses that are not generating a profit. A lot of them eventually will, and little companies become big companies, but the failure rate among beginning venture capital companies is extremely high.

Granted. Any further questions or comments? If not, this item will be held open that'll take us to issue nine, return processing technology support.

Yes, thank you. I'll be covering issue nine as well. This proposal is requesting 4.9 million and 29 positions beginning in fiscal year 23-24 and ongoing to maintain and improve our existing mission critical applications and services that support our return processing functions.

Our processes at FTB are underpinned by technology. 87% of our tax returns are fully processed without staff intervention, 83% of our personal income tax collection accounts are resolved through automated collections. And finally, 80% of FTB's tax payments are electronic.

Over the last several years, FTB's Technology Services Division, we've seen, consistently been asked to implement changes and adopt new legislation or workloads in support of our return processing through either legislative change or other internal change requests. At the same time, ongoing support and maintenance keeping the lights on of our FTB systems and services have also increased in complexity due to there's been enhanced fraud detection and validation needs. There's been exponential growth in the amount of data that's acquired and consumed, and also increased taxpayer demand for selfservices.

As a result, FTB and TSD, our Technology Services Division in particular, is experiencing critical resource gaps that are impacting our return processing workloads. This augmentation will enable FTB to reduce the risk of adverse impacts to return processing workloads, enhance our ability to react to change, and also make return processing easier. With that, happy to take any questions you may have.

Thank you. Is there a comment from Department of Finance?

Department of Finance we have no additional comments at this time. Thank you.

Thank you. LAO?

Brian Mueller from the LAO. And just a quick comment that applies both to issue nine and ten. The Legislature and the Governor have taken a number of actions to expand the scope and scale of FTB's responsibility in recent years.

And I think that's one of the major kind of drivers behind both of these BCPs that you're seeing here. And so I think that's just something for the committee and the Legislature to keep in mind as we move forward, considering other tax policy changes or other kinds of goals the Legislature may ask of FTB, is that considering kind of the administrative complexity that creates for the agency and factoring it into those discussions.

Thank you. We'll bring it back to the committee. There are no questions, comments from the chair, are there Member comments or questions? Senator Niello.

Just a quick comment. When this item comes back for a vote here, and beyond that, I hope there'd be some articulation about efficiencies of operations and different ways of doing things to perhaps avoid increasing staff.

Thank you, Senator. All right, this item will be held open. It brings us to issue ten, essential services and stakeholder support gaps.

All right, so back to me. So thank you. And Senator Niello, thank you for that question on issue nine. We will certainly do that. That is absolutely, I can assure you, something that we look at before we put forward any request for additional resources. We're a very innovative organization, constantly looking for efficiencies and taking advantage of those because there's always undone work to be sure.

So thank you for that request and we'll make sure that it is accommodated.

Thank you.

Thank you. So on to issue ten. This is a proposal requesting funding to ensure sufficient resources to do our work that's associated with support functions, including legislation, budget procurement, research, project oversight, equal employment, office services, and key HR workloads for maintaining employee talent.

So this is a very diverse proposal. And I'll just take a moment to thank Brian, Mr. Mueller, at LAO for his comments and kind of an introduction to this proposal because it is very much related predominantly to the increased work that we continue to engage in to support you folks there in the Legislature to ensure that you're able to meet your goals. So the BCP itself requests 2.5 million and 13 positions in fiscal year 23-24 and ongoing to enable FTB to engage in these critical support functions for internal services and external stakeholders.

Within FTB, there are multiple areas that support these core services for all of FTB. Workloads in these business areas have continued to grow in both volume and complexity over the last three years, if not five years. Years where workloads increased were originally thought to be anomalies and we just kept powering through.

Unfortunately, data continues to show that this is not the case and that the new norm for these workloads is in fact, at this enhanced level. As a result, the vision staffing levels for these support functions prevent FTB from responding timely or accurately or adequately to external or internal requests for services. FTB's inability to complete these critical support work efforts and products could jeopardize key policy efforts of the Administration and the Legislature and impacts FTB's ability to complete essential work in the most effective manner.

This augmentation ensures that FTB operations are strong and allows for that optimal service levels for all critical external partners. Thank you for your time and support, and I'm happy to answer any questions you have.

Thank you. Are there comments from Department of Finance?

Derk Symons, Department of Finance. Wanted to let FTP know how much the administration appreciates their outreach, and other than that, we have no additional comments. Thank you.

Thank you. LAO?

Thank you, Derk.

No additional comments. Thank you.

Bring it to the committee. There are no comments or questions from the chair. Are there other comments or questions? All right, this item will be held open. That'll bring us to issue number eleven, film and television tax credit.

Good morning Chair, Members. Colby White, Department of Finance, covering issue eleven. So, by way of background, since 2009, California has had a motion picture and television tax credit program to provide economic stimulus to increase film and television production and jobs in California, and to better compete with other states and international jurisdictions so that California could maintain its leading position in the motion picture industry.

Tax credits are provided to offset a set percentage of eligible production expenses. The first film tax credit was enacted in 2009 and allocated 100 million per year. Then 2015, the tax credit program referred to as Program 2.0 was expanded to 330 million per year for five years.

And then in 2020, Program 3.0 was enacted, which continued to allocate, on a competitive basis, 330 million per year in tax credits through fiscal year 24-25. Additionally, there was some expansions. The 2021 Budget Act expanded the allocation of tax credits under Program 3.0 by 90 million in 21-22 and 90 million in fiscal year 22-23.

And lastly, the 2021 budget also included 150 million in one time funding for the Soundstage program, which allocates tax credits in an amount equal to 20%, or 25% of qualified expenditures for the production of qualified motion picture in this state at a certified studio construction project. The proposal before you here today is to extend the existing 3.0 program hereafter referred to as Program 4.0, for an additional five years at 330 million in allocations per year from fiscal year 25-26 through 29-30. There's some key differences from 3.0, so the tax credits awarded under Program 4.0 will be refundable so that taxpayers that do not have income or sales tax liability can benefit from the credit.

To limit the fiscal impact to the state, taxpayers will be limited to claiming 20% of the original tax credit in any year with a 10% discount rate applied, so credits cannot be claimed over no less than five years. Refundability will be optional so taxpayers with sufficient income or sales tax liability will still be able to fully utilize the credits at their face value to offset their tax liability. Refundability will provide certainty to a wider range of taxpayers that they can benefit from the state's film tax credit program, which will increase the competitiveness of the program and yield more economic benefit to the state for each tax credit issued.

The proposed program 4.0 also includes a diversity work plan component to promote shared goals of providing equal opportunity in the motion picture and television production industry. The administration structured this proposal to provide an incentive of 4% of total dollar awarded amounts for project applicants to submit and make a good faith effort to achieve a project specific diversity work plan. This provides an incentive to opt into the diversity provisions without reducing the total amount of funding available for applicants.

We envision that all taxpayers applying for the credit will participate and be successful in their efforts and will therefore receive 100% of their award. The estimated fiscal impact of this proposal is within the multiyear budget window is 8 million revenue loss in 25-26 and 49 million in 26-27. And then lastly, the proposed trailer bill has some technical changes to the existing soundstage filming tax credit to ensure that program functions as originally intended.

So that concludes my remarks. Happy to take any questions. I'm also joined by my colleague at the California Film Commission for questions as well. Thank you.

Thank you. Any comments from Department of Finance?

Well, I'm Department of Finance, so I have no further-

Oh, I'm sorry. I'm an automatic structure pilot here. Forgive me. Hello, you are presenting. How about LAO? Not enough coffee.

Thank you, Mr. Chair. Brian Mueller from the LAO. Earlier this week, our office released an assessment of the economic effects of the film tax credit along with an assessment of the Governor's proposal to extend the film tax credit for an additional five years and make the credit refundable. So, just to recap some of the highlights from that report, starting with just some general context about the effectiveness of the credit, which as Mr. White mentioned, a key goal of the film tax credit is to maintain California's film industry in the presence of competition from other states with film tax credits of their own.

And so, looking at the outcomes in recent years, we see that California continues to have about half of overall employment in the US film industry, and that's been steady for about the last decade, maybe decline modestly in recent years, but really California remains far and away the largest employer in this industry. We also see the industry has had a steady level of production over the last decade or so, with the exception being in 2020 due to a dramatic drop off in activity during the early stages of the pandemic. We think that based on our review of research on state film tax credit programs, that California's film tax credit has been one contributing factor in the steadiness of the state's film industry.

Overall, looking at that literature, we find that there is evidence that states that have film tax credits have larger motion picture industries. And we think that California's credit has contributed to our industry being a few percentage points larger than it otherwise would be. That being said, it's unclear that the film tax credit leads to the state's overall economy being larger.

And the reason for this is that the state revenue that is lost to the film tax credit could have been spent on alternative state programs or activities, and those themselves would have economic benefits. And so our review of some of those kind of other potential expenditures suggests that we can't really be sure that the economic benefits we're getting in the film industry here exceed those that we would get through alternative allocations in the state budget. So then, turning to the Governor's proposal specifically, kind of in light of that last comment, we would suggest that the Legislature in its consideration of extension of the film tax credit, not think of it necessarily as a reliable mechanism to grow the state's overall economy.

However, to the extent the Legislature views it as a worthwhile goal to kind of defend Hollywood's essentiality in the motion picture industry, then this could be something worth considering. And if the Legislature does wish to move forward with the film tax credit, we do think that the proposal for refundability could be worth considering as well. Refundability making the credit refundable has both some pros and cons.

On the benefit side, right now, with the non refundable credit, you have somewhat unequal treatment of taxpayers and potential recipients where the ability to use the credit in a timely fashion will vary based on things that don't have anything to do with motion picture activity, like whether or not businesses have sales tax liability or whether or not they conduct research in the state. So making the credit refundable would kind of level that playing field among those taxpayers.

Also, there is some evidence that refundable credits can be more attractive, especially to bigger production companies, that may bring higher dollar productions to the state. And so that potentially could be a way of kind of furthering some of the state goals of the program. On the con side, one major area is that making the credit refundable would have a number of costs for the state.

It would both make the credits cost overall more expensive and would accelerate when the state would experience those costs. In addition, as I discussed a few minutes ago, it would create additional administrative costs and complexity for FTB. And there is kind of one additional con to consider, and that is that ideally, the state wouldn't even need the film tax credit and be competing with other states in order to maintain our industry.

But the presence of these kind of competitive film tax credits in other states has kind of forced the state to look at this as a potential tool. Moving the state to a refundable tax credit could in some sense spur other states to look at us and feel like they need to take another step to remain competitive.

And that could kind of put us into this somewhat of a so-called race to the bottom where we're continuing to compete with other states and continuously kind of ramping up the generosity of the credit. So if the Legislature does consider making the credit refundable, we would suggest doing so with a few modifications to the proposal as it stands. Specifically, we would suggest putting the credit on a specified claiming schedule to help kind of smooth out the costs for the state.

We would suggest reducing the overall annual allocation that is allowed, recognizing that refundability will make the credit more expensive, and also consider reducing some of the existing other flexibilities and use of the credit, for example, using claiming the credit against the sales tax. So that I'd be happy to take any questions.

All right. DOF any question, any comment?

I would. excuse me, refer back to the comments I made before about refundable tax credits, but I would hope that in extending this program that we would be able to quantify the benefit of providing the credit in the first place, refundable or not. I have seen where the FTB has posited that a dollar spent for every dollar spent in this area, the state gets $24 in economic activity. I don't know if it was referring to this or not, but I hear statistics like that to benefit spending, to argue in favor of spending in all sorts of areas, but rarely do I see a detailed quantitative analysis that shows that that dollar resulted in $24.

And I would hope that as this comes forward, and particularly with the history of the credit, that we could be able to show that the LAO made the comment, if I heard it correctly, that the the credit as it exists now maybe gives us a few percentage points larger than otherwise we would achieve in the attracting the film industry. That's not a lot. I don't know what it quantifies to. So I would hope we have some concrete visible analysis on the effectiveness of this.

Thank you, Senator. Senator Caballero, I would just you know, clearly there's a potential I'm looking forward to the conversation on refundability and seeing if there's a more balanced, universal set of applicable benefits to the industry. But clearly, as was pointed out, that would necessitate a cost impact to the state as well in real time.

And I wouldn't disagree with my distinguished colleagues comments about quantifying actual impacts, being very data driven around that. I think it's important that we have the conversation. I think it's important that we move this at some point.

But I did want to add one other comment. This is I think has been proven very valuable to this industry, which is helping keep it competitive as an industry that was largely born in this state and is associated with it. But as we look to that and as we review that, I want to flag an item about workplace safety protocols.

I think a lot of us have been aware that on the production side with this industry there were things occurring like the use of live ammunition on sets that resulted in some very tragic circumstances. But I think that when we take up the review of the credit per se, I'd like to also see whether we want to look at some safety language being included there in this space. And with that we will note that this item will be held and we'll move on to issue Twelve incomplete Non Grant or Trusts.

Thank you, Chair. So, Colby White again, Department of Finance and covering incomplete non grant or trust just by way of background, since it is a relatively complex issue. A trust is a commonly used estate planning tool that allows a person to hold assets on the behalf of one or many beneficiaries.

There are two types of trust grantor and non grantor trusts. Grantor trust, which is more common is revocable, allows the grantor administrative controller of the trust and the income and the tax attributes of the trust flow to the grantor. Non grantor trusts, on the other hand, grant control of the trust to a trustee who administers the trust and they are considered irrevocable.

The grantor gives in a non grant or trust, the grantor gives up right, title and interest in the principal of the trust basically gives up control. The non grant or trust is treated as a separate taxable entity and is responsible for the tax consequences of income deductions and credits. Generally, a grantor, someone who funds the trust that's residing in California, that moves assets to a non-grant or trust in another state would shield those assets from California's state taxes.

But the gift to the non-grant or trust would make the grantor subject to federal gift taxes or reduction in their federal state tax exemption. So, what we're talking about here is a more complex version of the non-grantor trust. These are called incomplete non grant or trust.

Incomplete gift, non-grant or trust sometimes called INGs, and they have been used in recent years to help high net worth individuals move assets out of state and avoid federal gift taxes and shield the assets from state taxation. They are often formed in states like Nevada or Delaware that do not tax the income of trusts. And these trusts straddle the line where the grantor retains enough control of the trust for its gift to be incomplete and therefore not trigger federal gift taxes, but still maintains the non grant or status of the trust, which means the granter is not taxed.

IRS rulings since 2013 have generally affirmed this strategy, and New York passed legislation in 2015 that closed the loophole for the state. So the proposal before you here today follows the successful example of the New York legislation, and it requires the net income derived from this particular type of trust to be included in the grantor's gross income. And this will close this particular loophole and is expected to increase revenues by 30 million in 23, 24, and 17 million in subsequent years and affect 1300 taxpayers in the first year and roughly 600 in subsequent years.

So, with that, happy to take any questions. Thank you.

Any comment from LAO? Good morning. Chad Alamo with the Ledge Analyst office.

No comments. In addition to the sort of overview that Mr. White laid forward, but happy to try to answer any questions the committee may have or get back to you with more specific details on this proposal. Thank you.

There's no questions or comment from the chair. Members have questions. Senator Niello, just a quick comment.

This is a maneuver that presumably would be made by high income taxpayers that would be kind of a foe moving out of the state move. And to change this law, change it in this way, perversely may just push that person over the cliff to actually move out of the state. Just, I think, a thought to keep in mind.

Thank you, Senator. If there's no more questions or comments, this item will be held open that will bring us to issue 13 student loan forgiveness income tax exemption.

Thank you. Chair Colby White, again at Department of Finance. So late last year, the Biden Harris Administration announced a plan to help working- and middle-class federal student loan borrowers sorry.

Which initially included, among other things, up to 20,000 in federal debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to 10,000 in federal debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than 125,000 or 250,000 for households currently under federal law. From tax years 2021 through 2025.

All federal student loans that are forgiven are exempt from taxation. The proposal here before you is a bit narrower and partially conforms to federal law, and it exempts from taxation any student loan discharged under the Biden Harris Plan administration's federal student loan debt relief plan. The plan is currently facing legal challenges heard by the Supreme Court, and whether it will be upheld is uncertain at this point.

If upheld, this relief is expected to provide over 3.5 million Californians or help over 3.5 million Californians, including 2.3 million estimated Pell borrowers. And with that, happy to take any questions. Thank you.

Comments from LAO. Thank you again.

Chas Alamo, with the Ledge Analyst office. First, just very brief comments about the sort of the policy merits of the proposal itself. In many ways, a borrower with outstanding federal student loans that are forgiven under the Biden-Harris Administration plan is not necessarily going to have the resources or the income available to pay state income taxes on those forgiven amounts, which is sort of the impetus for the administration's proposal here.

So, we do see some merit on the policy basis there. The only other common I'll add is a bit of sort of context or update on the Supreme Court case that Mr. White mentioned. The Supreme Court did hear oral arguments for this case earlier this week, and it sort of legal analysis and scholars sort of took the position that generally the Court was not looking favorably upon the Biden Harris administration's Executive action.

The Court will have made a private vote internally, and the Chief Justice will have distributed sort of the decision briefs. But customarily in the last several years. The Court has not made major case filings public until June.

So, the state California may be in for a few months of waiting before we know exactly what the US. Supreme Court has decided on the federal ruling. All right, thank you very much.

We'll bring it back to the committee. I would just have a question about programmatically. The Administration is focusing here with this proposal specifically on consistency with federal relief.

And that obviously there's a lot to be seen on that. But my question is with respect to other similarly situated programs provide relief for sort of Low income borrowers. A good example would be a program the Governor is proud of and that I'm a big fan of in the College Corps, where we reduce some debt by a maximum amount in exchange for a certain level of community service.

Is it the intent or the position of the Administration that we know to provide relief to all sort of low-income borrowers around across the lines of other similar programs, or are they just focusing on this particular program? Thank

you for the question. So for this particular proposal, we're focused on this particular program, the example you cite, and there are many other examples where there's been debt forgiveness, the issue of taxation, of debt forgiveness. I can think of the Utility arrearage program, for example, where we have exempted that relief from taxation, but we have generally looked at it on a case by case basis.

So I'm not prepared today to say that the Administration has a blanket policy for all debt forgiveness below a certain income threshold or something like that. But we have dealt with this issue on many different cases outside of just student loan debt. And

I do appreciate that. And obviously it would be linked to actual relief. You know, and I think that in cases where we're looking programmatically at providing actual relief people that are in this particular class of borrowers, I mean, I would encourage us to take a broad approach across the board.

But I would like to see that conversation, that element of the conversation, be included as we go forward. Are there other questions or comments from Members of the Subcommittee? All right, thank you. If not, that item will be held open and that will bring us to issue 14 new employment credit exemption for semiconductor companies.

Thank you. So, the new employment credit exemption for semiconductor companies under existing law, employers can claim the new employment credit for hiring a full-time employee. To receive the credit, they must meet certain requirements.

They must pay above 150% of the minimum wage. They cannot be engaged in certain excluded industries. The employee must be a member of a hard to hire population, which is defined in various ways, includes things like ex-felons, Calworks recipients, EITC recipients, et cetera.

And the employee must perform the majority of the work in a designated census tract or former enterprise zone. And the employee must represent a net increase in jobs for the employer. So, along with other proposals including the extension of the California Competes grant program, the proposed, I should say, and existing programs such as the sales and use tax, manufacturers exemption and research and development tax credit.

This proposal is part of the state's overall Chips Act strategy, which aims to incentivize semiconductor companies to invest in California based operations and leverage federal dollars that will be provided under the new Federal Chips Act. So this proposal also supports, given its focus on hard to hire populations, it does support the state's equity goals and the Department of Commerce's guiding principle of generating benefits for a broad range of communities and encouraging linkages to underserved population. The fiscal impact is estimated at 1.1 million annually from 23 24 to 25 26, and happy to take any questions.

Thank you. Any comments from Leo? Brian Eula from the LAO. Just following on Mr. White's comments about the Commerce Department's guidance on having an aspect of grant proposals that would focus on underrepresented populations, we think that taking this action could be a relatively cost-effective way for the state to allow California grant applicants to demonstrate that the state is providing funding toward that goal.

All right, thank you to the Subcommittee. Are there any questions or comments? Senator Niello, one question. Do we have data on the number of chip manufacturing facilities in the state of California and how many of those have been developed in the last, say, two decades?

I certainly don't have that data on hand I can take that back to our economics team and see what we can provide for you on that.

The reason I asked the question is because I think it was Andy Grove who famously said probably 20 or 30 years ago intel will never build another chip plant in California. And I think at least they've been good to their word on that. And I don't know about others, but my suggestion is perhaps we ought to look at other reasons to incentivize chip manufacturing in the state of California.

Thank you for those comments. I will point out that this particular incentive is part of a wider Chips Act strategy that the state's putting forward to leverage our new and existing programs. To that end.

Senator Caballero.

Thank you, Mr. Chair. Well, I know this is structured after the federal program that is encouraging chip production in the United States. Your point is well taken, Senator and I wonder whether there are other parts of the manufacturing world that we might consider to add to this.

In particular, electrified aviation as we move into new technology. There's a lot of energy, interest and resources going into this sector. And the reason I say this is because I'm familiar with one of the companies that has hired farmworker women to be part of their training program to learn, because right now it's in its infancy, and they're doing their production by hand.

And they found that the women have very agile fingers and are very good at the detailed work that's involved in the manufacturing. And so it occurs to me that we might want to look at enabling the flexibility of employers to hire a diverse workforce.

Thank you, Senator. If there are any further discussion or comments that item will be held open and we'll move to issue number 15 tax Expenditure Report. Thank

you. So this will be the last issue I'm presenting on today the Tax Expenditure Report. And the Department of Finance has been required to produce a tax expenditure report to the Legislature since 1972 initially on a bi-annual basis and then beginning in 1984 the frequency of the report was statutorily changed from once every two years to once every year.

The report provides a comprehensive list and brief description of tax expenditures exceeding 5 million in annual cost fiscal estimates of the tax expenditures and various other data such as statutory authority sunset date, number of taxpayers affected and comparable federal benefit. The deadline for the report currently is September 15 each year. So the proposal we're asking for a change is to change the deadline from September 15 to November 1 and requiring the reporting only once every two years then annually rather than annually.

So the shifting of the deadline to November 15 is to just better accommodate the timing of other budget related conflicting budget related and legislative Bill analysis workload which is relatively heavy around that September 15 time and then the move to biennial reporting is to alleviate workload more generally. Generally, changes to revenue estimates and the majority of the content in the report from year to year often do not change significantly, which could argue for a less frequent update of the report. And I'll just note also that there is overlap with other agencies that do tax expenditure reports.

Notably, the Franchise Tax Board, as part of their best practices, annually publishes a tax expenditure report covering personal income and corporate income tax expenditures. And the California Tax and Fee Administration issues publication 61, which covers sales and use tax expenditures. Thank you, and happy to answer any questions on that.

Great. Would LAO will have any comment? No concerns. All right.

To the Subcommittee. Questions or comments. Senator Niello.

Yes. Thank you, Mr. Chair. Just a comment that I trust that the LAO would not alter its practice of annually offering us their good advice on projection of tax revenues irrespective of the schedule that Department of Fance adopts.

That's a question? Yes, Senator. That's correct. This change would not affect in any way our reporting on revenues or our forecast practices.

Good. Thank you. Good question.

Thank you, Senator. All right. This item will be held open.

Issue items 16 and 17 are information only. Items issue item 16 is Better for Families Act update.

Hello again. As noted, I'm Jeannie Herriman with the Franchise Tax Board, and thank you for the opportunity to provide you information on the Better for Families Act program, which is most commonly referred to as the middle-class tax refund program. So, let's start with program status, and then I'll briefly chat about some of the issues we've had as we made our way towards the conclusion of this successful program.

Last week, FTB announced that we had now completed the issuance of first-time payments to Californians totaling 16.8 million, refund payments representing almost 32 million Californians and totaling 9.2 billion in direct relief. We are now predominantly, if not exclusively, working on reissuing debit cards that were lost, never received, or had a malfunction or fraud event occur. Additional debit card stats you may be interested in is that of the 9.6 million debit cards issued, 81% today have been activated for a total value of 4.2 billion.

Of those cards activated, 36% of those have a zero balance, and taxpayers have expended $1.5 billion. While we've met the commitment for this program to date and are celebrating the success, we also recognize that not all has gone as expected, and our room for improvement remains. So how did we get here, and what was the expectations of the program? As the rebate program was solidified last June during budget negotiations, the message for FGB became clear get the payments out accurately and quickly in a secure way and with minimal fraud.

We are well on our way to meeting these expectations, and every program implementation decision made focused on these goals. A common question raised throughout the program is why debit cards for the Golden State stimulus programs that FTB administered, FTB issued direct deposits and warrants. However, for that program for this program, if we had relied on issuing direct deposits and warrants, we would have wrapped up the program in late September of 23, many months from now.

Many felt this was unacceptable, and we agreed the state Pivoted considering the use of debit cards when the program was actually still focused on as a gas tax rebate and when DMV was the potential entity to administer the program. As early as June of 22, while legislation was still pending, DGs began a competitive procurement process for debit cards to be used in the finally agreed upon program. So let me take a moment to say that Money Network, the selected vendor, has been a great partner in this effort, but also let me give you a little bit of information about who Money Network is.

Money Network has more than 20 years of service in the financial services industry, with over 4000 clients spanning all sizes and industry. On average, they deliver 20 billion in funds annually excuse me. And since 2001 have served over 65 million cardholders.

They also had experience with the federal stimulus program, wherein they issued 16.4 million prepaid cards totaling 24 billion for that program. Lospair cards can be used anywhere and everywhere that Visa cards are accepted, and cardholders can get cash from any bank or credit union that displays the Visa logo. Some may not actually ultimately agree with the state's decisions to use debit cards, but the vast majority would also have been unhappy with having to wait another six to twelve months from now to get their payments.

Perhaps a case of pick your poison, as both choices have negative consequences. So let's take a minute to discuss program resources and potential fraud in the program. Customer service, of course, has been an issue, so let me set the stage and remind you that we just issued, in the last over eleven week period, 9 million debit cards.

Customer service is an imperfect activity wherever you go, but ultimately it is the most priceless function. When you consider the volume of cards that we issued in those eleven week periods and that almost 3 million cards were likely. In flight at any given time between being mailed, being activated or being used and our taxpayers needing to ask a question or report an issue.

It does help understand a little bit that customer service issues will arise, and staffing for this load is challenging. In mid January, let me give you a little bit of an idea. The service channels were experiencing almost 330,000 calls a day on the two dedicated phone lines, whether they needed to activate their card or ask a question.

With so many Californians trying to call in and struggling to reach an agent, FTB engaged in the following efforts. One, we began a public service campaign to encourage the use of the interactive voice response system then and today, 80% to 96% of calls are being answered on that IVR system, encouraging taxpayers to use the mobile app to manage their card, which has also been very helpful. In late December, with FTB's assistance, FTB implemented the following we added additional agents, we expanded the queue size so more individuals could get on hold and wait for an agent as opposed to just being disconnected, and we redirected staff to largely support the primary line as a higher priority.

Finally, by mid June we also recognized that we needed to look at extending the hours on the primary line, which we successfully accomplished with Monday Network support allowing for service all the way through 10:00 p.m. On weekday nights. So how did these changes do? Improvements have been noted as wait times have decreased and more Californians are able to access the call queues.

Calls today, I'm happy to report, are down from the 330,000 previous high to about less than 185,000 a day today, and dramatically deflected calls have decreased dramatically as well. That doesn't mean that we still don't have room for improvement, and Money Network and FTB are constantly and continually watching this and reacting to address gaps. So fraud is another key concern reported on extensively in the media.

FTB and Money Network are diligently watching fraud stats and conducting investigations into events. First, let me do say that no amount of fraud is acceptable, but a program of this size, regardless of the security measures put in place, was going to attract fraudulent intentions. To date, we continue to note that fraud within this program is significantly less than the 1% program metric that is projected in the contract, which is based on the industry observations of fraud rates across like programs.

An important aspect of a fraud action occurring is that there seems to be an erroneous perception that taxpayers that have been subjected to fraudulent actions are going to bear the financial burden of that event. Let me clearly state that is not the case. Each case will be investigated and every taxpayer will be allowed the benefit of receiving their full middle class tax refund payment.

In situations where taxpayers report potential fraud, in most cases, they work with Money Network to document the fraud and once the case is resolved, generally within 45 to 90 days, funds are replaced to ensure the taxpayer is whole. Before opening for questions, I have two other quick what's next items to share with you. First, while the IRS did not indicate this payment was not taxable, they did note they would not challenge the failure to report the middle class tax refund payment as income on a federal return.

We also asked the IRS to provide guidance for filers that already filed and reported the income on their returns, and we are awaiting final guidance from the IRS. Hopefully soon, 2nd March through May we'll be engaging in the next step of the program which is issuing reminder letters to individuals that have received a card and haven't activated it yet, or to cardholders that have stopped using their card once they've activated and actively used it. At this point, that number approaches about 2 million individuals, and we look forward to continuing to see Californians Activating and using these funds.

Thank you for your time today, and I'm happy to answer any questions you might have. Thank

you very much for the report. Other questions or comments from Members of the Subcommittee seeing none. This is an information only item.

We'll move on to issue 17, the Earned Income Tax Credit implementation update.

Thank you. I'm happy to report I was the original speaker on this, but I'm happy to report that Susan Maples was able to resolve a conflict and I'm going to turn this over to her capable hand. So, Susan good morning, everyone.

Susan Maples, Franchise Tax Board today I'd like to share a little bit with you about Caliitc and what's been happening. The federal EITC program began in 1975 as an anti poverty program for both adults and children to lift people out of poverty and to encourage labor market participation by providing additional benefits from employment. Beginning with the 2015 tax year, California adopted its own Earned Income Tax Credit and over the years has expanded it to include those with self employment income, childless adults under 25 and over 64, and taxpayers with itens.

As a result, EITC claims increased almost tenfold from this first year of just over 385,000 to more than 3.6 million in tax year 2021. In 2022, FTB submitted a study to the Legislature on EITC takeup and filing barriers to try and understand how California could increase taxpayers benefiting from this important financial resource. Today, I'd like to give this committee a brief update on the progress we've made as a result of the study and some results we are seeing as we get underway with the 2023 filing season.

One of the concepts in study mandated by Senate Bill 1409 was a simplified filing portal. Franchise Tax Board evaluated its current free online tax filing program, known as Cal File, for enhancements that could simplify or streamline the filing process. With last year's legislative enactment allowing taxpayers with zero income to claim the young Child Tax Credit, we incorporated modifications to allow certain individuals with zero income returns to claim this valuable credit for free directly with FTB using Cal File.

Another concept in our study focused on expanding education and outreach to potentially eligible Cali EITC taxpayers. We appreciate your support for our BCP last year that will allow FTB to begin outreach this summer. And while the shift in filing deadlines for the season has presented some challenges for timing of the letters, we are still on track to reach out to filers and nonfilers who appear eligible but fail to claim the credit.

In addition, FTB, Department of Social Services and Department of Healthcare Services continue to engage in data sharing to determine how and to what extent we can identify those eligible for EITC that may have missed the credit and promote outreach for our respective agencies, language to extend that data sharing, and a proposal to require employers and public assistance programs to notify employees and participants twice a year of the federal and antistate poverty credits. And both Vida and Calphile is currently included in trailer Bill language for this session and we appreciate the consideration of this proposal. Finally, FTB has partnered with the Office of Data and Innovation to include Cal EITC in the Statewide Benefit Recommender Pilot, which provides a link to obtain more information on Cal EITC benefits at the conclusion of an individual submitting an application for other public assistance benefits such as CalFresh and unemployment insurance.

Now, turning to the current filing season, we are just beginning to see returns come in and I am pleased to report for Cal EITC, the Young Child Tax Credit and the Foster Youth Tax Credit. Combined, we have seen nearly 900,000 returns that have already been accepted, of which nearly 400 were zero income Young Child Tax Credit filers and 1500 were Foster Youth Tax Credit filers. Typically, we expect upwards of 90% of Cal EITC filers to file by April 15 in order to claim their refund, but it is too early to tell to what extent this trend will continue with the due date being extended this year.

Also worth noting, this year we found several software vendors with submitted returns that calculated the EITC and or the zero income Young Child Tax Credit incorrectly. While these returns were adjusted in processing, it is just another reminder that the calculation for the Cal EITC credit can be complex. Therefore, we continue to work with our own organization and with our critical external partners to find new ways to remove barriers to claiming the Cali ITC that are both safe and secure, where both taxpayers and the state are protected, while also assuring simplicity as much as possible in claiming the credit.

Thank you for your time today and for your continued support and happy to answer any questions you may have. Thank

you for the report, Ms. Maples, to the Subcommittee or other questions or comments. Senator Niello.

Thank you. This program, as was pointed out, has grown over the years through Tweaks improvements to the program from a couple of hundred million to about a billion annually. The question I have, and there was some statistics relative to returns filed, et cetera, but has there been any work done to try to assess how it has actually affected the lives of the recipients of the Earned Income Tax Credit in terms of improving the life, improving proving economic circumstances of those who have received the funds? Sure.

Thank you for that question. Annually, FTB produces a report on the Earned Income Tax Credit under the Section 41 requirements, and a portion of that report is dedicated towards. Determining whether or not folks are lifted out of poverty.

So, yes, each year we do an in-depth analysis to understand whether or not this credit is actually lifting folks out of poverty. It'll be very good to include that information to the Legislature. Thank you.

Yes, I would agree. And I believe the report also is submitted to the Legislature each year for review.

But I'm happy to also provide a copy of that report for you after the hearing.

Thank you.

You're welcome.

Senator Caballero, thank you for that.

Yeah we're kind of old school. We need the hard copies so that we can read them. But I just want to say that this has been one of my passions, because the long-term research the Feds have been doing it for a long time shows that this particular tax credit has the highest probability of pulling people out of poverty because of the federal tax credit is fairly significant.

Ours is a percentage of the federal tax credit, but together, I think they make a tremendous difference. So, I would also like I'm sure we've got it in the office, but as long as you're passing out hard copies, I'd like a copy as well. Certainly.

And I want to thank FTB for working so closely with me on this one. My challenge was that we were spending pretty close to $5 million a year trying to get the word out about this tax credit. And I'd rather us figure out a better way to make it easier for taxpayers to access the resources than to keep talking about it as part of our PR on One action rather than paying a PR company.

I will second that a motion, as they say. Senator Caballero in the comments, both my colleagues, that item is also an information item. That brings us to public comment.

The Subcommittee very much encourages and appreciates the participation of Members of the public. We will start with folks who are present, if any. As a reminder, our participant number is 877-226-8163 and the access code is 718778.

For all Members of the public providing testimony, please provide your name for the record. And because of technological and time constraints, being respectful of folks time will limit each speaker's time to 1 minute or less, if you please. So are there witnesses present in the hearing room that want to provide testimony to Subcommittee? Please come forward again.

State your name for the record, and your time is limited to 1 minute. All right. Good afternoon.

Thank you, chair, Padilla and members, Samantha Sanguine, next gen, California and a part of the campaign for California bars rights coalition here for item 13 under the FTB. Items on the agenda we strongly support and thank our legislative leaders and Budget Committee leaders for the Legislature's proposals in SB Two 20 and AB 35 to provide state tax relief on federal student debt cancellations through full conformity with the American Rescue Plan. Act, or ARPA, exempting student debt relief from state taxation will allow California student borrowers to fully realize the benefits of student debt cancellation.

And this is a crucial step in protecting our most vulnerable borrowers. This is especially urgent right now as borrowers continue to struggle through the pandemic recovery and high inflation rates. This full conformity to ARPA would capture several student federal leaf programs and discharges under the Biden Administration beyond just that 1020k student debt cancellation plan.

And this is critical because if these release are included as income, it could be potentially push borrowers into higher income tax brackets, further exacerbating their financial insecurity. Thank you, Chair Padilla, for your comments today. Similarly, our coalition letter submitted to the committee outlines a couple of proposals we're requesting to further strengthen this issue.

And so, again, thank you. We strongly support the Legislature's proposals in SB Two 20, AB 35, and respectfully request that this be adopted in the state budget with consideration of the recommendations from the coalition. Thank you.

Thank you. Are there other Members of the public want to provide testimony? Please come forward. Welcome.

State your name for the record. Your time is limited to less than 1 minute or less. Thank you.

Hi. My name is Sam Wilkinson, representing Grace in the Cal EITC coalition. Thank you all for holding this hearing. I'm here to first share our gratitude to the Senate for including expansions of the Cal EITC and the Young Child Tax Credit and your Key Values budget plan released yesterday.

We'd also like to ask the Senate to support a $300 minimum for the Cal EITC and expanding the Young Child Tax Credit to include all EITC eligible filers, both of our coalition's priorities under AB 1128 and AB 1498. We know that these refundable tax credits provide direct cash assistance to Californians who need it californians who need it most, and are one of the best tools to curb poverty. As three quarters of Cali ITC eligible filers are people of color, these refundable credits are a powerful step toward a more racially and economically equitable California.

Thank you all so much for your support.

Thank you. Are there other Members present in the hearing room want to provide testimony to the Subcommittee? Thank you for your testimony. We'll go to the moderator excuse me.

To prompt the individuals waiting to dial in. Gentlemen, if you wish to queue up for public comments, you may press one. Thank you.

Hi, my name is Cody Hunani and I'm the Executive Director of the Student Debt Crisis Center. I'm calling on behalf of item 13 under the FTB. Items on the agenda, we strongly support SB 220 and AB 35, which provide state tax relief on federal student debt cancellation through full conformity with the Federal American Rescue Plan Act or ARPA.

Californians hold nearly 147 billion in student debt. This debt is a burden for families, and it hampers the statewide economy, along with the disproportionate impacts for low-income students of color. SB 220 and AB 35 conform state law to the American Rescue Plan Act, or ARPA, which exempts from federal taxation several recent federal student loan relief and discharge programs.

The exemption from state taxation would allow Californians to realize the full benefits of debt cancellation. We also asked for consideration for proposals to strengthen this legislation. A technical amendment to add language to reference ARPA, as it is currently in print, would safeguard any changes in the future.

And secondly, we are concerned that a stipend for college students enrolled in the Cal Volunteers College program is taxable as income as well. So we urge the Legislature to adopt SB 20 and AB 35 into the state budget along with consideration of these recommendations. Thank you.

And given the disproportionate impact of the mental health crises on black children and youth, including suicide and traumatic contact with the criminal legal system, we encourage the Legislature to consider policies that decouple the use of the lifeline from law enforcement agencies, especially for calls from schools for student mental health crises. Thank you very much.

Thank you. Next caller.

Line 16.

Good morning, Chair and members, Hannah Bragstad with the Cal State Student Association, which represents the nearly half a million CSU students throughout the state, calling about item number 13 under the Franchise Tax Board. Items on the agenda we are also in strong support of SB 220 and AB 35, which will provide much needed state tax relief on federal student debt cancellation. Thank you.

Thank you. Next caller.

Line 17.

Hello. My name is Orlando Cabalo. I'm the coordinator for the Free the Degree Campaign and a part of the Campaign for California Borrower Rights Coalition. Free the Degree represents over 3.1 million college students nationwide, including many here in California. We strongly support SB 220 and AB 35, which provides state tax relief on federal student debt cancellation through full conformity with the federal American Rescue Plan Act.

With nearly 4 million student loan borrowers in California, the language in SB 220 conforms state law to ARPA, which exempts from federal taxation several recent federal student loan relief programs under the Biden Administration. For these reasons, we strongly support the Legislature's proposal and SB 220 and respectfully request that it be adopted into the state budget, along with consideration of the recommendations the coalition is requesting. Thank you.

Thank you. Next caller.

Line 19.

Good afternoon, Chair and members. My name is Sarah Bouabibsa and I'm the west advocacy manager for Young Invincibles and a part of the Campaign for California Borrowers Rights Coalition. I'm calling about item 13 under the FTB items on the agenda. We strongly support SB 220 and 80 35, which provides state tax relief on federal student debt cancellations through full conformity with the Federal American Rescue Plan Act. As we know, California has nearly 4 million student loan borrowers, and about 3.5 million of them would benefit from debt relief. For these reasons, we strongly support the Legislature's proposal in SB 220 and AB 35 and respectfully request that it be adopted into the state budget, along with considerations of the recommendations the coalition is requesting. Thank you.

Thank you. Do we have an additional caller?

Line 18.

Good afternoon, Chair and members, Manny Rodriguez on behalf of the Institute for College Access and Success, commonly known as TICAS, commenting on item 13 under FTB items. TICAS recommends that the Legislature adopt language within SB Two 20 AB 35, which broadens the tax relief on federal debt cancellation through full conformity with ARPA. We just want to uplift that this is critical from a racial equity and economic equity perspective because student loan debt disproportionately impacts low-income students and BIPOC communities.

Finally, we echo the concerns on the stipend for college students enrolled in the Cal Volunteers College Corps program. Those could be taxable as income, and we urge Legislature to find a solution for these. Let's ensure more Californians are on solid financial ground by supporting the language in SB 220. And let's build a debt-free pathway to college by addressing those issues in the College Corps program. Thank you.

Thank you. Next caller.

Line 21, please go ahead.

Hello, this is Kevan Insko with the Friends Committee on Legislation of California as part of the CalEITC Coalition. Our thanks to the Senate for including the CalEITC and YCTC expansion in your key value budget plan. We ask for your support of these expansions. And also under item 13, our organization strongly supports SB 220, AB 35, to provide state tax relief on federal student debt cancellation. Thank you.

Thank you. Next caller.

Line 22, please go ahead.

...

If the caller could suspend, I apologize for interrupting. If the caller could suspend your testimony just for a moment, can I go to the moderator and IT staff? I think we may have a little connection problem here, and I know that we want to be able to hear the member of the public's testimony clearly. Can we go ahead and try that again, caller, please?

Is this better now?

Not quite sure. Try it again.

Can you hear me now?

We can please proceed.

...

All right. To the caller, we appreciate and respect your participation. Unfortunately, we all live and die by technology these days, and we don't have a clear connection to take your testimony over the phone. We would encourage you to please submit the testimony in writing to the committee staff, and we do appreciate your participation. Thank you. Next caller.

Line 20, please go ahead.

Good morning. My name is Mike Pierce, and I'm the executive director of the Student Borrower Protection Center, a proud member of the Campaign for California Borrowers' Rights Coalition. We're a nonprofit organization dedicated to eliminating the burden of student loan debt and advancing policies that reign into predatory practices that have exacerbated this crisis. I'm calling to offer remarks regarding Item 13 under the FTB items on the agenda.

State our strong support for SB 220 and AB 35, legislation that will ensure federal student loan debt relief is exempt from state taxation. We applaud the committee for taking swift action to ensure that the more than 3.5 million borrowers across California who are eligible for President Biden's historic debt relief plan are shielded from state taxation. This debt cancellation will offer life-changing economic relief for millions of borrowers across California and the nation, with more than 90% of its relief employing families earning less than $75,000 per year. Taking action to protect these low-income borrowers from a state tax bill is absolutely critical. We applaud the committee for taking urgent action here, and we look forward to working with you to ensure this bill becomes law.

Thank you. Do we have one remaining speaker? Thank you. Next and final speaker.

Thank you, Chair and committee members. Eleana Binder, representing GLIDE, a social service provider in San Francisco, and the CalEITC Coalition. We are grateful to the Senate for prioritizing the expansion of the CalEITC and the YCTC. I respectfully request that you further support a $300 minimum for all who claim the CalEITC and to expand the YCTC to include all CalEITC eligible filers. Thank you.

Thank you. And the committee thanks all members of the public for your participation and testimony. Do any members of the committee have any comments based following public comment? All right. We'll then take up the vote only calendar, issue items one through three. We're going to segregate first items one and three and take issue item two separately. As to items one and three, I'll entertain a motion.

Move is staff recommendation.

I'll second. Oh, there are no seconds in the Senate. I was in local government too long. The motion is to approve as requested. Please call the roll. Absolutely. Senator Niello, these are ours to items one and three.

Want to be able to do a second?

Just old habits die hard.

I wouldn't offer a second, not because I was remembering that practice, but because I'm going to vote no. I just want to explain that given the deficit, which I personally believe is probably going to grow, though, thankfully, I don't think it's going to be anywhere near the debacle that we had in 2009, which Senator Caballero will, of course, remember along with me. But I will be taking a very cautious approach, but guided by priorities, which I think is important. And I do not see the need for either one or three. So I will be voting no.

All right, consultant, please call the roll.

Senator Padilla. Aye. Caballero. Aye. Niello. No.

Thank you. The ayes are two, the noes are one, and that item is moved out. All right, let's take up item number two.

I'll move that one as well.

I'll second that.

Thank you, sir.

This is where I talked to the issue of priorities. Mental health, particularly with regard to proposals relative to homelessness, but mental health generally. This is a budget priority, needs to be a priority, and I support this.

Thank you, senators. The motion is to approve as recommended. Please call the roll.

Senator Padilla. Aye. Caballero. Aye. Niello. Aye.

Thank you. The ayes are three. The no's are zero. The item is out. All right. Thank you for that. Thanks for all our individuals, to our consultant, to our staff, for your work and for folks participation. Your comments are most welcome and appreciated. Appreciate everyone's patience. The Senate Subcommittee Number 4 will stand adjourned.

You ran a good meeting. I've had this meeting last much longer than this.

Oh, thank you, sir. Overhead. Thank you.