Assembly Standing Committee on Revenue and Taxation

Alright. Well, good morning everybody. We'll go ahead and get started. Welcome to today's information hearing on California's Tax Expenditure Program. So I want to remind everybody that for this hearing, testimony and public comment must be in person. We are no longer using a moderated telephone service. Before we start, I would like to thank the Members and panelists, the Member and Members and panelists in attendance today as we examine California's tax expenditures, along with their features, administration, and occasional complications. And then I would also like to welcome our newest consultant, Wesley Whitaker, to the Committee.

I know you're going to do a good job. This hearing will be an opportunity for new Members on the Committee to develop a conceptual framework for reviewing tax expenditures as such proposals compromise a significant majority of the bills that this Committee considers. While tax expenditures may be defined in a number of ways, this Committee generally considers tax expenditures to be any tax credit, deduction, exclusion, or exemption. These features of the tax law are generally designed to encourage certain taxpayer behavior.

As we will hear in greater depth momentarily, tax expenditures require a majority vote to enact, but a two-thirds vote to repeal. Additionally, according to some estimates, the total cost of tax expenditures to the state is over $69 billion in this year alone.

Given these facts, this Committee reviews tax expenditures with careful scrutiny, requiring an appropriate sunset provision and full compliance with revenue and Tax Code Section 41 for a tax expenditure measure to be eligible for a vote. Today, we will further examine the factors informing this treatment. This year, California faces a potential budget shortfall of over $20 billion, and this Committee hopes that this hearing will shed light on the expenditures that are not typically considered in a budget hearing.

With that said, would any of the other Members that are sitting on the dais right now like to provide any comments? All right. Thank you. And as a reminder to Members, please wait for your questions until the end of each of the panels. Panelists, after you have finished your presentations, please remain seated so that the Members may ask questions. We will now move on to our first witnesses in this panel, Colby White, our first witness. Should we seat the whole panel?

We can have the whole panel.

Why don't we go ahead and have the whole panel come up? And that would be Colby White, Denis Armstrong, Susan Maples, Michele Linton, and Bradley Miller. All right, Colby White, who will be speaking, is the Principal Program Budget Analyst with the Department of Finance. We have asked the Department to provide a brief picture of the state's budgetary situation this year and a General overview of tax expenditures. Mr. White, you may begin.

Good morning, Madam Chair and Members of the Legislature. Colby White, Department of Finance, and thank you for the opportunity to be here today. I will be providing a brief recap of the state's current budgetary condition, and then I will give an overview of the state's tax expenditures, how they are defined, how they are reported and evaluated by the state, including, but not limited to the Department of Finance's Tax Expenditure Report and how they compare to direct expenditures.

So first slide, please. So, while the revenue outlook is substantially different than the previous two years and has been revised significantly downward, the state does remain in a relatively solid fiscal condition due to prudent prior actions that built resiliency into the budget, including a focus on paying down debt, committing new spending to one-time purposes rather than ongoing, and building healthy reserves. Excluding transfers to the Budget Stabilization Account and solutions, the most recent forecast of the 23-24 Governor's Budget, was $29.5 billion lower than the Budget Act forecast and with an estimated budget gap in fiscal year 23-24 of $22.5 billion.

This budget gap is proposed to be addressed through a combination of funding delays and shifts, various reductions, and limited borrowing and revenue solutions. However, due to budget resiliency, reserves of $35.6 billion are maintained and drastic spending cuts have been avoided. And more recently, cash results since the Governor's Budget do indicate ongoing weakness. Results through January are $3.3 billion below projections, and this shortfall is principally due to weakness in personal income tax revenues as well as corporate tax revenues, excluding the impact of the pass-through entity tax.

And we will be updating our projections, of course, for the May Revision. Next slide.

So, when talking about tax expenditures, as noted in the Chair's introductory comments, it is important to first define what a tax expenditure is and what it is not. And here in this slide, I have listed the definition that is in the State's Government Code, which underpins the Department of Finance's Tax Expenditure Report, and it defines a tax expenditure as a credit, exclusion, deduction, exemption, or any other benefit provided by the state.

While this definition is broad, Finance has interpreted it to mean aspects of the law that are basic to the tax structure are not tax expenditures, and I will touch a bit more on that later. But it is important to note that there can be judgment in determining what is basic to the tax structure, and therefore different agencies can define what is the tax expenditure differently.

Next slide. Currently, there are three state agencies that regularly put out a tax expenditure report. First, there is the Department of Finance, which is statutorily required to publish an annual report. Second, the Franchise Tax Board, as part of its best practices, annually produces an annual tax expenditure report that covers the personal income tax and corporate income tax revenues. And lastly, the California Department of Tax and Fee Administration produces what is called Publication 61 and that reports on tax expenditures under sales tax law.

The Legislative Analyst Office and the Bureau of State Audits also periodically have reported on various tax expenditures. Next slide.

So, regarding the Department of Finance's Tax Expenditure Report, I'll go into a bit more detail. We provide each year a comprehensive list of tax expenditures in the areas of property tax, sales tax, corporate income tax, and personal income tax that exceed, have a fiscal cost in excess of $5 million per year.

The report includes the following. It includes the statutory for each tax expenditure. It includes statutory authority, description of legislative intent when available, the sunset date, intended beneficiaries, an estimate of the state and local revenue loss for the current and two subsequent fiscal years. Next slide, please.

It also includes the number of tax returns, taxpayers, tax returns, or businesses claiming the benefit, a listing of any comparable federal benefit, and lastly, a listing of other tax expenditures or reports or evaluations completed by any state agency in the last year. Our report, while listing legislative intent, is generally a descriptive document. It does not evaluate the effectiveness of tax expenditures. Next slide.

I mentioned earlier that judgment was required to determine what is part of the basic tax structure and therefore what would deviate from basic tax structure and therefore be determined to be a tax expenditure. Here on this slide are some examples of items that Finance does not consider tax expenditures because they were judged to be part of the state's basic tax structure.

These examples include sales tax not applied to leases of real property, sales of services, wholesale transactions or sales of securities, net operating loss deductions, California's progressive income tax structure itself, exemptions required by the Constitution, and changes to penalties or interest or the timings of payments and lastly, apportionment rules. Obviously, this is not a comprehensive list, but this is just to give an example of certain things that are not considered tax expenditures. Next slide, please.

And here on this slide, I have listed some of the more well-known tax expenditures included in our report, and these include the research and development tax credit, which is intended to incentivize research and development activity within the state, employer-provided health insurance, which is an exclusion from taxation for health insurance provided by employer,s exclusion of capital gains on the sale of principal residences and the mortgage interest deduction.

While this is not always the case, each of these listed tax expenditures also has a comparable federal benefit in federal law to which the state either fully or partially conforms to. Next slide. As noted in introductory comments, the tax expenditures can generally be divided into very two very broad categories, those that are intended to provide an incentive for a particular type of behavior and those that provide relief for taxpayers that may be facing a particular economic hardship.

An example of the former is the aforementioned research and development tax credit, which is intended to encourage R and D in the state, and then also an example of a tax expenditure. Providing relief is the state's earned income tax credit, which provides a refundable tax credit to taxpayers that are below certain adjusted gross income thresholds. Next slide.

So, evaluating the effectiveness of tax expenditures and I think others will have more to say on this in following presentations, but I'll just highlight some of the difficulties, particularly those that are intended to incentivize a particular behavior. Those evaluations can be difficult due to limited data availability, indirect effects, and the difficulty in estimating opportunity costs.

Tax expenditures, to some extent, that are intended to incentivize behavior, will result in windfall benefits, which are defined as benefits to businesses or individuals that would have undertaken the activity even in the absence of the tax expenditure. The extent of windfall benefits is a key factor in determining a tax expenditure's cost relative to its benefit, although it is not often clear what would have happened in the absence of the tax credit. Next slide.

In the interest of increasing transparency and evaluation of new tax expenditures, Revenue and Taxation Code Section 41 was passed and requires all new tax expenditures created after January 1, 2015, to include specific goals, purposes, objectives, performance measures, and data collection requirements to allow the Legislature to evaluate the effectiveness of the tax expenditure. Because of Section 41, there is now consistent reporting by the Franchise Tax Board, the LAO, and other agencies on various tax expenditures. Next slide, please.

So now I'm going to talk briefly a bit about the differences between tax expenditures and direct expenditures. Both types of expenditures can be used to accomplish similar policy objectives, but they have some distinct characteristics and there are trade-offs to either approach. Some differences to keep in mind is tax expenditures can be reviewed less frequently.

This has changed somewhat recently with newer tax expenditures subject to Section 41 reporting requirements, as well as the practice which has been in place, I think, for over a decade or so. New tax expenditures coming out of committees have been required to have sunset dates.

Tax expenditures, unlike direct expenditures, may not have control over the foregone revenue once they are in place, but there are exceptions, and these would include any tax expenditures that have a reservation system or, for example, capped and allocated tax credits such as the film tax credit and the Cal Competes Tax Credit, which do have clear control over the foregone revenue. And tax expenditures are accounted differently than direct expenditures.

One is a revenue reduction the tax expenditure, while a direct expenditure obviously is simply an expenditure increase, and that's how it's reflected in the state's financial statements. Next slide, please.

And then lastly, the vote requirements for tax expenditures and direct expenditures can be different. While both types of expenditures may be enacted legislatively with a simple majority vote, the repeal of a tax expenditure requires a two-thirds majority, while a direct expenditure can be repealed with a simple majority vote. Next slide.

So on my last slide here, I did want to highlight that revenue estimates related to tax expenditures can be difficult for a variety of reasons, including lack of data, particularly with regard to, for example, sales tax exemptions, where estimates may be based on industry data rather than tax data because they are exemptions and aren't necessarily reported on a tax form. Also, revenue estimates for tax expenditures in our report is done in isolation.

It does not account for behavioral changes that may shift revenue loss to an alternate tax expenditure. So one example here would be if you eliminated the exclusion of income earned in ScholarShare 529 plans, you might just shift those savings into the Coverdell education savings account with similar tax benefits.

So, therefore, we caution, when using reports such as the Department of Finance's Tax Expenditure Report, it is important to recognize that repealing a particular tax expenditure may not yield the revenue highlighted in the report and may simply result in other tax expenditures being used more. Next slide.

So with that, that concludes my prepared remarks, and again, thank you for the opportunity to be here.

Thank you, Mr. White. We will now hear from our next panelist representing next panelists representing the Franchise Tax Board. Dennis Armstrong is the Director of Legislative Services Bureau, and Susan Maples is the Director of the Economic and Statistical Research Bureau. Welcome.

Good morning. My name is Susan Maples. I'll be speaking first, and I am, as you said, the Director of the Economic and Statistical Research Bureau. Thank you so much for having us here today. Today I'd like to take just a couple of minutes to cover the different types of tax expenditures and how Franchise Tax Board gathers information about those tax expenditures from the tax returns that are filed and the resulting reporting of that information.

The first thing to understand about tax expenditures is why we call them tax expenditures. The tax and tax expenditures comes from the fact that they provide benefits through the tax code. The expenditures and tax expenditures comes from the fact that conceptually, the same benefits could be provided via a traditional government expenditure program.

For example, the R&D credit could be replaced with a grant program for companies undertaking research, or the mortgage interest deduction could be eliminated and the government could send homeowners a check equal to the percentage of their mortgage interest. So with that, I'd like to kind of just cover the three different types of tax expenditures that we have. First, we have exemptions and exclusions. These are monies that are received but not included in the calculation of taxable income.

Examples include employer benefits, contributions to health insurance, Social Security income, and lottery winnings. Since they are not included in income, the recipient's taxable income, and therefore their tax, is lower than if these items were included in income. These are also the most difficult and hardest for FTB to track since there is no information about them that appears on the tax return. Next, we have deductions. These are the amounts that can be subtracted from income. Examples include qualified mortgage interest, charitable contributions, and IRA contributions.

Deductions allow taxpayers to reduce their taxable income and thus the tax paid. Finally, we have credits. Credits are direct reductions in the amount of tax due. Examples include the renters' credit and the earned income tax credit. Tax credits can also be refundable and nonrefundable. So, for example, if a taxpayer owes $10 in tax liability but is also eligible for a $60 renter's credit, the taxpayer can reduce the tax liability by the $10 to zero.

But because that credit is nonrefundable, the taxpayer is limited to the $10 credit and loses out on the remaining $50 in credit. Some refundable credits, however, have a carryover provision that would allow for these unused credits to be carried over to future years and potentially used against future liabilities. However, if this were a $60 earned income tax credit, which is a refundable credit, the taxpayer could again use $10 of the credit to reduce the liability to zero.

But in this case, since it's refundable, the additional $50 would be refunded to the taxpayer in the form of a check or direct deposit. So with that, I wanted to spend a little bit of time talking about the reporting requirements that FTB does and has. FTB has been reporting annually on tax expenditures we administer since around 2003, even though we are not statutorily required to do so. A copy of the most recent tax expenditure report was provided to this Committee.

The first section of the report really defines tax expenditures and reviews the major justifications and concerns with them. The most common justifications are to provide relief for taxpayers who are suffering hardship, to incentivize behavioral changes, and to promote administrability. The most common concerns are that they may necessitate an increase in tax or, alternatively, cuts in government spending, they can complicate the tax code, and they can also reduce policy flexibility.

The second section of our report discusses individual California income tax expenditures, including thoughts on the intent of each provision, the cost of the expenditure, and where the data is available, the distribution of the benefits from that expenditure. FTB also produces reports on tax expenditures as required under Section 41. Section 41 is the provision requiring that when California adopts a new tax expenditure, the enacting legislation will include a purpose for the new provision and instructions for producing a report evaluating it.

In some cases, however, the needed data to properly evaluate the expenditure is not available, particularly in the case of exclusions and exemptions where no data is required on the tax return in order for taxpayers to calculate and pay the correct amount of tax. In other cases, however, it can still be difficult to capture this data. So I'd like to give you an example.

A perfect example of this happened when AB 37 was passed, which allowed certain cannabis businesses to deduct ordinary and necessary expenses, such as wages, rents, and the like. Section 41 requirements of this Bill provided that FTB collect data and report on the number of deductions and credits claimed, as well as the total dollar amount of deductions and credits claimed as a result of this law change.

However, in order for FTB to provide this information, we would need a reliable method to identify the tax returns where the data is reported, and also to be able to capture the correct data from the tax returns. Both of these items presented a problem. To identify a return in a particular industry, we usually use its principal business activity code. However, in this case, there isn't a principal business activity code for cannabis.

In addition, we would need to be able to identify all taxpayers who receive flow-through income from those cannabis businesses because the data is required to be reported on the amounts claimed on returns. The second piece, being able to capture the correct data off the return also presents a unique set of challenges, as unfortunately, not all details and amounts about these expenditures are easily identifiable. In fact, the data needed for the report could appear in several different schedules on both the state and federal tax returns.

In essence, the data cannot be specifically identified on the California tax returns, and it's not as easy to report on as if, say, it were a credit that had its own form and line item on the return that we could just easily capture during processing that we could actually key in during processing of the tax return. As a result, FTB created a new form, Form 4197 to have taxpayers self-identify and report the benefits that they receive from these types of tax expenditures.

However, since this form is voluntary and oftentimes, unfortunately, it's often not included with the tax return, again making Section 41 difficult to report, difficult to produce. Currently, we are using the Form 4197 to collect information from taxpayers not only on cannabis, but aid other tax expenditure programs as well for other deductions and credits. While necessary data can be collected on those tax reforms, it typically takes around three years to receive and process all of the relevant returns due to the return filing deadlines, often pushing us out past the date that the Section 41 report is required to be delivered to the Legislature

So, regardless, even with tax return data and ample time, it can be very difficult to produce a meaningful analysis of the efficacy of the tax expenditure, particularly when FTB's only insight is into the number of taxpayers who are claiming the credit and the dollar amounts claimed on the returns.

Now I'll turn it over to Denis to discuss a little bit more on tax expenditure Administration.

Thank you, Susan. Good Morning, Madam Chair and Members of the Legislature. My name is Denis Armstrong and I'm the Legislative Director at Franchise Tax Board. I will spend the remaining portion of our time discussing the administrative aspect of tax expenditures. Definitions play a huge role in ensuring accuracy and clarity when administering these programs. In general, taxpayer eligibility will be determined based on filing requirements, income levels, or expenses paid. These are key items that require clear and concise language to ensure proper handling of these expenditures.

An example of this can be found in Assembly Bill 195 from last session, which created two cannabis credits. This Bill defined key terms by utilizing existing state and federal terms, which reduces confusion, provides clarity and consistency for administering these programs. Assembly Bill 192 the Better for Families Tax Refund does a great job of specifying the California adjusted gross income ranges applicable for each refund amount. Next is clear processes and administrative responsibilities.

This is typically necessary when there are multiple departments or agencies that are responsible for administering these programs. Going back to Assembly Bill 195, the statute does a great job of describing the specific roles that FTB and the Department of Cannabis Control have in order to administer the program. This is especially important when programs are outside of FTB's expertise, such as the Healthcare Mandate Program.

Moving along, I would like to mention lead time and resources required. FTB strives to administer California tax law in the most efficient and effective manner possible. We treat legislative mandates as a top priority at FTB and ensure that our resources are operating properly to achieve the desired result of the Legislature. There are situations when the requirements require additional resources or additional lead time to implement.

This typically happens when FTB is required to build a new process or system to administer the expenditure additionally, FTB's system constraints impact certain programs and the timeframe to implement. For instance, there has been an appetite to turn off FTB's offset process when dealing with certain expenditures. Though this could have negative impacts to our existing processes, we are working towards introducing this functionality to our tax systems for the 2024 tax year moving forward.

While this isn't a comprehensive list of considerations, I hope this does illustrate the impacts that certain provisions have on our FTB systems and processes. We continue to look for innovative ways to implement all pieces of enacted legislation and are always open to collaborative efforts to improve our processes. We work with Mr. Ruff and his team, as well as other authors' offices, to communicate all considerations in hopes of making the necessary adjustments for successful implementation.

Next, I would like to walk through the difference between standard income tax credits versus capped and allocated credits. As Susan mentioned earlier, tax credits are direct reductions in the amount of tax due. Taxpayers are generally eligible for standard credits by engaging in specific activities and meeting other specified criteria. Taxpayers would then claim the credit on their annual income tax return. Then FTB would validate the credit using our standard tax return process. Capped and allocated credits are a bit more nuanced in nature.

The mechanics of how the credits interplay with the taxpayer's liability is the same. However, capped credits place a hard cap on the amount of credit that can be claimed at the program level. This presents some challenges to FTB as our tax return processing is nonlinear. We do not have a way of timestamping each return that claims a specific credit to determine when a max credit cap has been reached.

It is also difficult to track paper versus electronic filing tax returns again for the purpose of tracking that maximum credit amount. Another struggle with this type of credit is the situation in which a tax preparer may be holding on to specific returns in order to file in bulk. This could potentially disallow a taxpayer from being eligible for a certain expenditure.

Many times, as in Assembly Bill 195, capped credits have a reservation requirement in order to ease these implementation concerns. Taxpayers claiming this type of credit are required to obtain a credit reservation prior to filing a tax return claiming this credit. This allows the Franchise Tax Board to keep track of the amount of taxpayers that are obtaining a reservation in order to turn off the system when the credit cap has been reached.

While we certainly understand the value of such systems, they do add a layer of complexity, impacting FTB's speed and agility to administer these programs. Allocated credits are credits in which there is a certain amount allocated to a taxpayer from a control entity based on certain qualified activities. This allocation is the maximum credit amount that can be utilized by the taxpayer and generally, both FTB and the taxpayer are noticed as to the allocated credit amount.

Under current statutes, these allocated credits are also capped at the program level to recognize the set amount allocated to the specific tax program. An example of this can be found in the motion picture credit where the California Film Commission provides a certificate to qualify taxpayers with the allocated credit amount listed. Lastly, I would like to share a few thoughts on our audit process. Our audit process is considered proprietary in order to protect the integrity of our audit programs and processes.

However, we can state that normal rules selecting audit candidates for every audit type apply and strongly rely on the consideration that noncompliance exists. We do maintain an equitable audit process by developing knowledgeable and engaged employees who responsibly conduct audits with integrity and fairness. This concludes our presentation on tax expenditures. Thank you very much for your time.

And I want to remind all the Members that we have two more presentations and then we will be open for questions. So our final presenters will be representing CDTFA, Michele Linton, Chief of the Legislative Bureau and Bradley Miller is the Business Taxes Specialist at the Department. CDTFA has been asked to provide an overview of tax expenditures they administer and difficulties in their Administration. Ms. Linton and Mr. Miller, please start when you're ready.

Thank you. Good morning Madam Chair and Committee Members. I'm Michele Linton. I'm the Legislative Director for the California Department of Tax and Fee Administration and I have with me today Brad Miller, a business tax specialist from CDTFA's Tax Policy Bureau. And Brad and I will be sort of jumping back and forth sharing the division of labor on this presentation. CDTFA, first slide please.

CDTFA administers 39 tax and fee programs including sales and use tax, cannabis taxes, cigarette and tobacco products taxes, fuel taxes, hazardous waste fees, and 911 surcharge, among others. Together, these programs generated over $94 billion in revenue for fiscal year 21-22. Next slide, please. CDTFA allocates revenues to a variety of funds. The sales and use tax rate is comprised of state, local, and district transactions and use taxes.

For the 21-22 fiscal year, the state component included $34 billion allocated to the state's General Fund, 9.1 billion allocated to the state's Local Revenue Fund, 2011, $4.7 billion to the state's Local Revenue Fund, $4.7 billion allocated to the Local Public Safety Fund and 11.6 billion from the one and a quarter percent. Bradley-Burns Uniform Local Sales and Use Tax, which is allocated among all the state's 58 counties and 482 cities. Next slide please, and I'll hand it over to Brad.

Good morning, I'm Brad Miller with the CDTFA. As Michelle mentioned, the CDTFA also collects and allocates the one-and-a-quarter percent Bradley-Burns Uniform Local Sales and Use Tax for all California cities and counties. For each sale, one-quarter percent goes to the county transportation funds and 1% goes to city or county operations.

The local portion of sales and use taxes is allocated to cities and counties based on a complex set of rules that depend on a variety of factors that differ depending on whether the sale is characterized as a sales tax or a use tax. These include where the sale takes place, where the property is first used, and the location of the customer. District taxes. CDTFA also collects and distributes voter-approved district tax transactions, sales and use taxes on behalf of tax districts throughout the state.

These district taxes fund a range of local services and infrastructure, including general government, transportation projects, open space, hospitals, and public libraries. In fiscal year 21-22 CDTFA administered 379 district taxes, consisting of 63 countywide districts, 313 citywide districts, and three unincorporated area districts. District tax rates vary by district and revenues totaled $13.7 billion. Next slide. Special taxes. In addition to the sales and use tax, CDTFA administers numerous special taxes and fees.

CDTFA's special taxes and fees are allocated to funds specified in legislation and help maintain our roads and highways, provide emergency services such as the 911 emergency telephone service, preserve our natural resources, and offer social services and healthcare programs.

Next slide, please. CDTFA, as the Department of Finance does, generally considers tax expenditures to be provisions in state law that reduce revenue through preferential tax treatment, credits, exemptions, exclusions, or any other tax benefits the state provides. But we'll focus on the credit exemption and exclusions. A credit is an offset against tax liability, so an example of a credit would be the Main Street Small Business Tax Credits that were applied to either income or sales taxes to offset the burdens of COVID-19 on the state's small businesses.

An exemption is like an exception to tax imposition for certain types of transactions. An example is the Manufacturer's Research and Development Equipment Exemption. An exclusion from tax means that certain types of property are not included in gross receipts or the sales price at all because of certain definitions or they don't involve a transfer of tangible personal property. For example, certain cash discounts and charges for installation, labor admission charges, or the sale of securities are all excluded from tax. Brad? Next slide, please.

The tax expenditures that result in the greatest revenue losses are exemptions for the necessities of life, including food, electricity, and medicine. Sales of food for human consumption are generally exempt from tax with several exceptions. Revenue loss from this exemption amounts to $9.8 billion a year. The sale of gas, electricity, and water, including steam and geothermal steam, brines, and heat, are exempt from taxation if delivered through mains, lines, or pipes.

Further, certain sales of water to individuals for household use and certain sales of liquid petroleum gas are exempt from tax under certain circumstances. Revenue loss from these exemptions total 6.2 billion. Prescription medicines and certain medical devices are exempt from sales and use tax provided certain conditions are met. Over-the-counter medication is not exempt. Revenue loss from this exemption amounts to 5.2 billion.

Some tax expenditures are designed to help certain industries. For example, the exclusion for qualified motion pictures and qualified production services, a transfer of any qualified motion picture or associated rights if done prior to the date, the qualified motion picture is broadcast, and the performance of production services in connection with the production of that motion picture are excluded from the definition of sale and purchase. Revenue from this exclusion amounts to $158 million annually.

Also, the manufacturing and research and development equipment exemption. Sales, purchases, and leases of manufacturing and research and development equipment are exempt from the 3.9375% portion of the sales and use tax rate when sold to or purchased by qualifying manufacturers and certain researchers and developers for use primarily in manufacturing and research and development activities. Revenue loss from this exemption amounts to $343 million annually.

Additionally, sales and purchases of farm equipment, machinery, and their parts are exempt from 5% of the sales and use tax rate when sold to or purchased by qualified persons engaged in the business of producing and harvesting agricultural products or when sold to qualified persons that assist them. Revenue loss from this exemption amounts to $147 million annually. Other tax expenditures may be enacted to support values like charitable work or alternative energy.

For example, the sale and use of meals that are delivered to homebound elderly or disabled persons by a nonprofit home delivery meal provider are exempt from tax. Revenue loss from this exemption amounts to $138 million annually. And we also value alternative energy.

So there is an exclusion for qualifying entities that apply for financial assistance from the California Alternative Energy and Advanced Transportation Financing Authority for specified tangible personal property purchased for projects that process or use recycled feedstock or that are used in the state for advanced manufacturing and advanced transportation technologies. Revenue loss from this exemption is $89 million annually. Brad?

Next slide, please. Some exemptions, such as the manufacturing, sales, and use tax exemption and the farm equipment exemptions that Michelle previously mentioned are partial exemptions, which means that certain components of the sales and use tax rates are imposed while others are not. Other partial exemptions that currently exist include sales of gasoline, which is a 5% exemption.

It's important to note with sales of gasoline that the reduced sales tax rate is offset by an increased excise tax rate per gallon. Teleproduction or other postproduction service equipment has a 5% exemption. Diesel fuel used in farming activities or food processing is 5%. Timber harvesting equipment has 5% exemption. Racehorse breeding stock is 5%. Zero-emission transit buses is 3.9375%. Zero emission motor vehicles, 3.9375%, and finally, diesel fuel is a temporary partial exemption operative October 1, 2022, through September 30, 2023, at 3.9375%.

Usually, a partial exemption is enacted to protect local revenues. However, they can complicate compliance for taxpayers. This is because the rates vary depending on which portions of the sales and use tax rate are exempted. For example, one partial exemption may be 5% of the rate, while another may exempt 3.9375%. When taxpayers struggle to comply, taxpayers make more errors in reporting. The more conditions that are imposed on an exemption, the more complicated it is for the taxpayer.

For example, regardless of whether we're talking about a full exemption or a partial exemption, if an exemption only applies to certain people in certain industries for specified property used in a specified manner, it is more difficult for the taxpayer than an exemption that has only a single qualification. CDTFA maintains a robust audit program to ensure businesses report the correct amount of tax, no more and no less.

The existence of an audit program encourages voluntary compliance, and the vast majority of the taxes that we collect are voluntarily remitted. CDTFA audits concentrate on those most likely to be inaccurate in their tax reporting. To help us better identify accounts most in need of audit, we are utilizing data analytics with machine learning to identify reporting errors. We are also performing more desk audits early on to identify underreporting and avoid repeated mistakes and more penalties in subsequent periods.

This allows us to perform more audits at lower cost and reduces the need for more burdensome audits later down the road. In fiscal year 21-22 the sales and use tax audit program disclosed net deficiencies of nearly $477.3 million. Taxpayers also received over 209.1 million in audit-related sales and use tax refunds, and that concludes our presentation.

Thank you very much. We're going to open it for questions from the dais, but I first wanted to ask Mr. White, obviously, we've heard how complicated it is to administer and calculate some of these tax expenditures. How does this impact the budget forecasting efforts? And with these uncertainties, how does the Department account for those?

Well, the revenue forecasting process consists of many facets, including starting with an economic forecast that underlies the entire forecast. And then from there, we're moving to translate that to a revenue forecast for the state. The tax expenditures are... for example, if it's a new tax expenditure, we would make and estimate going forward.

And we would overlay that on top of the forecast tax expenditures, like, for example, the research and development tax credit. We have tax data going back and we prepare estimates going forward, and that's incorporated into our forecast. So we have the new pass-through entitiy elective tax, which is a very large, it's not a tax expenditure, but it's a very large component of our forecasting at this point due to its size.

So it's a combination of the economic forecast, but then we have to look at all these tax expenditures. Some of them we don't look at individually. They're part of the base personal income tax, and employer-provided health insurance. That's all sort of part of the base collections. It's not much of a forecasting issue at this point.

So there's different facets depending on the age of the tax expenditure, how long it's been in the base and what type of tax expenditure, a credit versus a deduction, and things like that.

All right. Thank you. Questions from the dais? All right, well, you must have answered all of them, then. So thank you very much. And we will go ahead and move on to our second panel. We have Brian Uhler, Professor Darien Shanske, Kayla Kitson, Preston Young on our second panel.

Thank you, Madam Chair. Brian Uhler from the LAO. I've prepared a handout for your reference today, and primarily, just as a summary of some of the key points from my presentation for your future reference, the first part of the handout covers some background information on what data the state kind of currently collects and maintains on tax expenditures. A lot of that was covered by the previous panel, so I won't cover that again.

But just to elaborate on one point there, in particular, sometimes some important questions come up around tax expenditures around distributional issues, and there are some important limitations in terms of the data we currently have on tax expenditures in terms of how many of those kinds of distributional questions we can answer. In a lot of cases, we know basic information about where in the income distribution tax expenditure claimants fall. We might know what industry sector they're in or what type of business they are.

But in most cases, there's very limited or no information on demographics, things like race and ethnicity and education levels, and so questions around distribution on those factors are very difficult to answer in many cases. So with that, moving into the second part of the handout which is considerations for the Legislature on evaluating tax expenditures--and I think it's important to start the discussion with the fact that most of the state's tax expenditures are rarely, if ever, evaluated. And now there are some important exceptions.

The Chair mentioned the efforts the state has undertaken and then the Legislature has undertaken in recent years to apply more scrutiny to tax expenditures that have been adopted more recently, and so tax expenditures put in place over the last decade or so definitely have more evaluation and data collection than some of the state's older tax expenditures.

Another kind of exception to this is tax expenditures that the state shares with other states or municipalities or other jurisdictions where academic researchers, essentially because of the broad application of these tax expenditures, have more incentive, have more opportunity to evaluate those, and so we have more literature to look to on some limited number of these tax expenditures. A couple examples are the film tax credit and the research and development credit. Now, these studies are often not specific to California.

Nonetheless, they can help provide valuable information on thinking about the state's tax expenditures. One reason that a lot of--especially the older tax expenditures--are rarely evaluated is that good evaluation is both difficult and time-intensive. It can require piecing together many disparate sources of data, performing a variety of data analyses, talking to relevant stakeholders to understand the nuances of the program and its administration.

It can involve reviewing the academic literature that may exist on it and trying to put all these pieces together into kind of a coherent evaluation of the tax expenditure's efficacy. And so, to give you an example, our office has a small unit of folks who a portion of their time can be spent on tax expenditure evaluation, and when we do undertake one of those, it might require dedicating one or more staff for six months or more to produce a single evaluation.

So just to give kind of a sense of--at least from our perspective--what it takes to provide that kind of in-depth evaluation of a tax expenditure. So, thinking a little bit more about what are some of the complications that add complexity to evaluating a tax expenditure, often the discussions on evaluating a tax expenditure will start with some of the basics on how many taxpayers are claiming this tax expenditure? What's the dollar value of those claims? What sort of outcomes are they reporting?

So an example, how many tax credits are being allocated to California Competes Tax Credit recipients and how many jobs do they say that they're creating? That's a very important piece of information and baseline for the evaluation, but that does not provide a full picture of, really, the efficacy of the tax expenditure, and there's a number of important considerations that have to be layered onto that in order to get a more complete picture.

And my colleague Colby White from the Department of Finance did mention a few of these in his presentation, but maybe just to add a little bit more detail on some of them, the first important consideration is what is sometimes called the 'but-for question' or what Colby referred to as the question of kind of windfall benefits. And this is the idea of, you know, what extent would whatever the desired activity occur in the absence of the tax expenditure? Taxpayers are often will undertake an activity.

Excuse me--they will receive a tax benefit, tax benefit for an activity that they would have undertaken anyway, and in fact, the consensus on the literature that exists so far seems to suggest that in most cases, the majority of taxpayers are receiving a so-called windfall benefit for tax expenditures that have been evaluated generally. A second key consideration is indirect effects, and so these are kind of downstream, secondary effects on non-recipients that might occur because of an action that a taxpayer receiving a tax expenditure took.

So these can both positively and negatively affect the overall assessment of a tax expenditure. An example of a positive indirect benefit may be that tax expenditure encourages a business to hire an additional worker. That worker uses their wages in the local economy. That supports additional jobs. So that's an example of a positive indirect effect. An example of a negative indirect effect is so-called crowd out effects. So you might have--an example could be a tax credit that is trying to encourage homebuilding.

And as we know, land is very scarce in many areas, and so a tax credit given to one developer that allows them to move a project forward may take up a parcel that could have been used by a competing developer, and so the net effect on overall homebuilding is unclear. The final important piece is thinking about opportunity costs, and so the basic idea being the state loses revenue with having these tax expenditures in place. We could have spent that on alternative programs.

Those alternative programs also have important economic and other benefits that need to be weighed against whatever measured benefits we may have for the tax expenditure. So spending a little bit more time on the first of those considerations, what I called the kind of but-for question or the windfall benefits question, as Colby mentioned, this is a very difficult question to answer. We really have no way of knowing for certain what would have happened in an alternative universe where the tax expenditure didn't exist.

There are some methods that we have of trying to answer this question, and there are some better ways of doing it and some worse ways of doing it. So, just to give you a sense of some kind of criteria you could be looking for in thinking about whether or not a study that is trying to measure this kind of windfall benefits question is done well or not, and so one important question is, is the focus of the study targeted correctly?

Is it thinking about the correct target population for the goal of the tax expenditure? Sometimes that might be the tax expenditure recipients themselves. We only care about changing their behavior and not any other sort of secondary effects, but often the focus should be more broad. It needs to be on a target demographic group or an industry sector or the intent might be to, for example, improve economic conditions in a certain geographical area.

And so it's important to ask whether or not the focus of the study is really aimed at the correct kind of target population. And then it's important that that study is using, essentially, a control group or comparison group to help to kind of really rigorously determine whether or not the outcomes among that target population are due to the tax expenditure or would have happened anyway.

And so, again, a way of doing that is comparing tax expenditure recipients to a similar group of individuals or businesses that didn't receive the tax expenditure, and so there's a few ways that that can kind of be set up. Maybe the gold standard is that the tax expenditure is randomly assigned among businesses or individuals, and that might be through a lottery or something else. That's pretty rare.

There was at least one instance of this that we had maybe kind of by happenstance in the film tax credit early on where that did allow us to do somewhat more rigorous evaluation of some of those outcomes, but it's pretty rare that we actually have sort of a lottery or random assignment of tax expenditures. Kind of the next level down are what's sometimes referred to as natural experiment--

Could I just interrupt for one second? Could you go into that a little bit more about the film tax credit and that there was a random--

Yeah, so--

Experiment?

Yeah. Early on, we had a statutory required evaluation of the film tax credit back in 2014, and we discussed how early on, I believe the program was essentially oversubscribed, and there was no kind of dictated mechanism for allocating the credits among the folks who had applied for it, and so it was basically awarded through a lottery but we were able to record information about the people who apply but didn't receive credits under the lottery.

And this allowed us to--because we had this random assignment--this allowed us to basically kind of assume that recipients and non-recipients were pretty similar. And one of the things that we used this data to look at was essentially among productions that applied for the credit but lost in the lottery, how many of them still filmed here? And we found that it was about a third.

And so that allowed us to put one estimate on this kind of question of the windfall benefit in the film tax program being that in that case that it looked like maybe a third of those productions would have been filmed here even if the tax credit didn't provide them any benefit. Sorry. Kind of first level is kind of random assignment. Next is what's sometimes referred to as natural experiments.

And this can be something where, for example, some aspect of the program's design creates sort of an artificial threshold that breaks up the group of people who receive the tax benefit and the ones that don't. So an example might be a very hard income eligibility threshold, where folks only up to 50,000 dollars are eligible for a tax credit. But we would think that someone making 50,000 dollars and someone making 50,001 dollars are pretty similar, and so we can compare the outcomes across those two groups.

And that's an example of kind of this natural experiment set up that academic researchers might be looking for those kinds of opportunities to evaluate. The final kind of next level are various kind of statistical methods that try to take a comparison group that hasn't been randomly assigned. We don't have one of these natural experiments, but we try to use kind of other techniques to make that comparison group look more similar to the folks who receive the tax expenditures to provide that kind of comparison.

So those are kind of some ideas of things to be looking for that would be incorporated in what we might consider a good evaluation, but it is important to keep in mind that no single study on a tax expenditure is going to be authoritative. Even studies that incorporate the best of these elements that I mentioned, they still have limitations, and so one study is better than having nothing, but it's even better to have kind of a consensus of a literature to really get a full sense of the effectiveness of a tax expenditure.

And it's also important to keep in mind that there are some important questions about tax expenditures that, frankly, with no amount of research, will be able to answer definitively, and regardless of how much data we have or anything else just simply because of kind of the limitations inherent in some of these techniques we try to use to estimate these effects. So with that, I'll be happy to take any questions at the appropriate time.

Thank you very much, Mr. Uhler. Our next panelist is Darien Shanske, Professor of Law at UC Davis. We've requested that the professor provide an academic evaluation of tax expenditures. Whenever you're ready.

Thank you. It's great to be here. It's an honor to be here. You have my testimony, which has live links to various sources but I brought a couple of hard copies, if I may distribute them, Madam Chair.

Okay. So, first, I'd like to start with my working definition of a tax expenditure. It's a little bit different from that of the Department of Finance. I consider a tax expenditure a tax rule that is different from the rule that would be prescribed by the principles underlying the tax at issue and typically to advance some policy goal. This is a little bit narrower than that of the Department of Finance, and that's fine. Think it's better that they give you more information rather than less.

But I want to explain where I'm coming from. I put together nine General principles, rules of thumb that I would propose for you to think about in connection with tax expenditures. A bunch of them have been reviewed already, so I will go quickly over those, and those that add something different. I will go a little bit more slowly about. First, be skeptical about tax expenditures, and for many reasons. The first one is that all tax expenditures narrow the tax base, and that alone should be avoided.

California is governed by a balanced budget rule. So if you have a tax expenditure and you want to raise a certain amount of money, you're going to have to raise tax rates someplace else. The rule of thumb in public finance economics is the higher the tax rate, the more the economic distortion. To get the intuition, think about the things you would do to avoid a 20% tax, and think of what you would do to avoid a 5% tax.

So to the extent you could have a broader base, you could have lower rates and less economic distortion. There is also ground rule two, strong consensus that narrow tax incentives do not accomplish much. We've talked about that, and we can talk more about it as well. Lots of academic literature about it. There are some exceptions. People will come and argue that you should improve new tax expenditures because they're the exception. And what I would encourage you to think about is they're probably not the exception.

I'd also want to make a point that there's an analytic connection between tax incentives and the integrity of the overall tax system. Tax incentives are only powerful if they allow people to avoid taxes they would otherwise have to pay. So if the tax system is already porous, then tax incentives aren't going to be very powerful at incentivizing the behavior that you want. Ground rule three, be careful when creating new tax expenditures.

Right as we've talked about, easy to create, hard to evaluate, almost impossible to get rid of. So again, be skeptical. Fourth, more conceptual point based on how I think about tax expenditures, not all tax expenditures on these various lists, which, again are terrific, are really tax expenditures. So, for example, the Department of Finance and the CDTFA considers the manufacturing and research and development equipment exemption to be a sales tax expenditure because people are paying less sales tax for these purchases.

I would not consider that a sales tax expenditure because the sales tax is meant to tax only final consumption, not intermediate purchases of business assets. And so that actually is a tax that is appropriate under sales tax principle. Note that. And this actually jumps ahead to point number six. There are also major tax expenditures not on the list. So, for example, if you want to tax all final consumption, you should tax all digital goods as well. That has been the trend in other states as well.

So if you buy a physical book, you're taxed. If you download an ebook, you're taxed. To the extent our sales tax does not tax digital goods, that is a hole in the sales tax based on sales tax principle. And I would consider that a sales tax expenditure. Fifth point, not all tax expenditures are problematic. So we've talked about the Earned Income Tax Credit.

Clearly, giving a refundable credit to the working poor is not part of the income tax in terms of what the income tax is trying to achieve. On the other hand, the EITC, I think, is a well attested and effective way of alleviating poverty. To the extent you want to help the working poor, you need to know who they are. The income tax system is what collects that information. And so administering that information through the tax code makes a lot of sense.

And so it's a tax expenditure. But I would say it's a different kind of tax expenditure. It should still be evaluated on its consequences. Back to number six. There are major tax expenditures not on the list.

So the largest single corporate tax expenditure, about 5 billion, protected by the Department of Finance in 20232024 is the income lost because California does not do very much to combat the shifting of income out of the US and California tax bases by large multinational corporations through a riveting provision known as the water's edge election. If you want to hear more about it, I can tell you more about it.

So, since this is a deviation from corporate income tax principle, there's no reason to exempt income if it's shifted abroad. It is properly listed on the list of tax expenditures. On the other hand, what is not on the list is that the federal corporate tax now contains at least two provisions, including one put into place by the Trump Administration meant to combat income stripping. That provision is known as the global intangible Low tax income provision. Guilty.

They spent a lot more time working on the acronym than on some of the mechanics. Also, as part of the Inflation Reduction act, there's the corporate alternative and minimum tax, again, that was just passed, meant to be layered on top of guilty to combat income stripping. Those two provisions are not conformed to by California, and they're also not on the list. Now, presumably they would bring back some of that same $5 billion that revoking the waters edge election would bring back.

But I just wanted to point out that those provisions are relatively Low hanging fruit. You conform to the federal rule and they're not on the list. Okay .7 consider interactions with the federal system and other important policies. So tax expenditures don't exist in a vacuum. Consider the home mortgage interest deduction. As you know, there's a similar deduction at the federal level, and there's a lot of literature that suggests that that is not a great tax expenditure.

But let's assume you think it is a reasonably good tax expenditure. The federal tax base on the federal tax rates are much higher than California's tax rates. And so to the extent that the home mortgage interest deduction is a tax expenditure at the federal level, it is doing whatever it's doing to encourage home ownership.

And so what you'd have to think about from the California perspective is, is the added increment of expenditure from the California personal income tax actually doing anything that the federal provision isn't already doing, and whether that increment of California income lost is worth it, given that California has a balanced budget rule and the Federal Government doesn't. Principle number eight, consider distributional effects. We've talked about this a little, and I know that Kayla Kitson is going to talk about it next.

But a lot of tax expenditures are upside down in terms of their distributive effects, in terms of who gets it on the income scale. If they had to be passed through the regular budgetary process, I doubt they would. And so those should be considered, right? So the classic critique of tax expenditures is that they're hidden spending and they're hidden spending that wouldn't stand up to scrutiny if actually scrutinized. Final principle, consider creative ways to cap expenditures.

So eliminating or even capping a particular tax expenditure can be, I believe, politically challenging. That's your job. But I believe that that's true. And as a policy matter, one might reasonably believe that many expenditures do some good while worrying about their overall cost. But so it's not a trade off, though, between having it and not having it. You could come up with creative ways to control costs while preserving the expenditures. I'll give you one example.

California has a corporate minimum tax that appropriately does not permit the use of many tax credits. Right. The idea is you should pay at least a certain amount, no matter how much credits reduce your tax burden. However, California's corporate minimum tax permits actually the biggest tax credits against it, including the R D credit. So California's corporate minimum tax doesn't do very much because at least I'll let the FTB tell me that I'm wrong.

But to the extent that you can use the R D credit against on the minimum tax, it's not much of a backstop. But it doesn't have to be that way. You can make the California corporate minimum tax a minimum tax for which you can't take any credits. Or there's another step you might take. One might forbid the use of the R D and other credits against the corporate minimum tax, but only for taxpayers that have taken the water's edge election.

In this way, the state would be saying to profitable businesses, we will support your growth very generously. California's R D credit is very generous compared to other states. We can talk about that. And I will also tell you that as far as tax credits go, the R D credit is one of the lesser bad ones, right? So its policy bona fides are better than average. So maintaining the R D credit has some justification.

But what California would be saying by tying it to the waters edge election would be saying, corporation, we'll support your growth generously. But when you make money, you need to make sure to share a minimum amount, I. E. Through the corporate minimum tax, or adopt a methodology of calculating your corporate income tax liability that demonstrates that you are not inappropriately shifting profits abroad. So you have a choice.

Pay the minimum or show that this is really how much you owe, because you are revealing that you're not shifting income abroad through adopting worldwide combined reporting. And so that is it. As I want to emphasize again, I am at your disposal to answer questions now or in the future.

Thank you, Professor. We will now hear from Kayla Kitson, senior policy analyst with the California Budget and Policy Center. We have asked the center to give their perspective on tax expenditures. Please begin when you're ready.

Thank you very much, Madam Chair, Members of the Committee, I am Kayla Kitson, senior policy analyst at the California Budget and Policy Center. Our organization engages in fiscal and policy analysis as well as public education with the goal of improving the economic and social well being of Californians with Low and middle incomes. I appreciate the Committee holding this hearing today and the opportunity to speak. I'll start by outlining three main points.

First, much of the more than $70 billion at estimated personal and corporate income tax expenditures goes to tax breaks that disproportionately benefit wealthy families and profitable corporations. Many of these tax expenditures perpetuate existing economic and racial inequities. Second, the revenue lost to tax expenditures represents dollars that are not being invested in other critical public services like education, Healthcare, childcare, and affordable housing.

Yet this spending through the tax code is not regularly considered as part of the budget process, and it's harder to scale back than direct spending. Finally, California can and should improve the oversight and evaluation of tax expenditures and then use that information to determine whether to maintain, reform, or eliminate a given expenditure. Scaling back tax breaks that are inequitable or ineffective would free up revenue for other investments to improve the lives of Californians who receive little benefit from tax breaks.

Now I want to return to the economic and racial equity implications of tax expenditures. Many costly personal income tax expenditures primarily benefit Californians with higher incomes. The cost of these inequitable tax expenditures is far larger than the cost of tax expenditures that primarily benefit California with Low and middle incomes. For example, the four largest itemized deductions for individual taxpayers will cost the state nearly $12 billion in fiscal year 202324.

For all of these deductions, more than three quarters of the benefits goes to tax filers with adjusted gross income above $100,000, even though they represent only about one fifth of filers overall. In comparison, the state will spend less than $1.3 billion on the state's three refundable tax credits, the Earned Income Tax Credit, the young child tax credit, and the new foster youth credit. These are the only tax personal income tax expenditures that benefit families with the lowest incomes.

These families cannot fully benefit from deductions or nonrefundable credits since they have little to no income tax liability, but they do pay other state and local taxes. Many tax expenditures also perpetuate racial inequities. We know that black, Latinx, and other Californians of color are less likely to have high incomes due to past and present racism and discrimination. This means that they are less likely to benefit from tax breaks that disproportionately benefit higher income families, and this exacerbates racial income and wealth inequality.

Additionally, some tax breaks specifically benefit families with wealth holdings. And because many Californians of color have been historically excluded from wealth building opportunities, these tax expenditures widen already large racial wealth gaps. A recent working paper from the US Treasury Department's Office of Tax Analysis provides more evidence showing that some of the most costly tax expenditures do overwhelmingly benefit white families. The authors examined eight different federal tax expenditures, many of which also exist in California's tax code.

They found that 91% of the benefits of the deduction for charitable contributions goes to white families, as does 84% of the benefit for the mortgage interest deduction. In contrast, they found that refundable tax credits, including the Earned Income Tax Credit and the child tax credit, were the only expenditures they considered that do not disproportionately benefit white families. Yet, as I stated earlier, these refundable tax credits represent a very small share of the overall revenue loss that the state loses to tax expenditures.

The second main concern about tax expenditures is that although they do take revenues off the table for other services and investments, they receive preferential treatment compared with direct spending. And as we've heard from other panelists, tax expenditures don't need to be authorized each year through the budget process, as does direct spending, which means that they're subject to less scrutiny and often can continue from year to year without debate.

Additionally, a two thirds vote is constitutionally required to reduce tax expenditures, while direct spending can be cut with a simple majority. This unequal treatment of tax expenditures and direct spending means that spending on things like cache aid for families living in poverty, subsidized childcare, and affordable housing is more vulnerable to cuts than tax breaks for profitable corporations. For example. And on the subject of corporate tax expenditures, it is concerning that a large share of the foregone revenues may provide windfall benefits to highly profitable corporations.

And for many of these tax breaks, as we've heard before, there is minimal or mixed evidence of their cost effectiveness. The creation and expansion of corporate tax breaks is a large part of the reason that corporations pay about half of what they did a generation ago in state taxes as a share of their California income.

If corporations had paid the same share of their income in state taxes in 2020 as they did in 1981, state revenues would have been about 14 and a half $1.0 billion higher. And for context, this is more than the state spends on its two state University systems and student aid combined. I'll end my comments by lifting up some key recommendations that the Committee can consider to improve the oversight and the equity of tax expenditures.

The Pew charitable trusts found that California trailed other states in implementing best practices for tax expenditure evaluation. Several of their recommended practices could be considered by the Committee. For instance, state leaders could require tax expenditures to be regularly evaluated by a nonpartisan entity and then require legislative hearings to consider the findings of these evaluations. Instituting sunset dates for tax expenditures in combination with these evaluation requirements is also a strategy to ensure more regular review and dialogue.

And I do want to commend the chair for enforcing a rule requiring sunset dates for new tax expenditure proposals. State leaders could also consider putting sunset dates on existing tax expenditures to ensure that they are reviewed on a timely basis. And finally, I would recommend policymakers also regularly consider both the racial and economic equity effects of tax expenditures and also incorporate that information into decisions on whether to continue, modify or eliminate existing tax expenditures and whether to create new tax expenditures.

Taking a hard look at tax expenditures is critical because, again, every dollar that the state spends on inequitable or ineffective tax breaks is a dollar that could have gone to better support the well being of our communities. Thank you so much for having me, and I'm happy to answer any questions after the panel is done.

Thank you, Ms. Kitson, Mr. Young.

Thank you very much, Madam Chair and hello, Committee Members Preston Young from the California Chamber of Commerce. Thank you for having me here today. It's nice to see everybody and be back at it again. My goal today is to just share a couple of comments from an employment based perspective. It goes without saying California is a difficult place to do business. We have the highest sales and use tax rate in the country at 7.25%. Local governments are permitted to levy additional taxes.

On top of that, we have the highest gas tax rate in the country. We have the highest personal income tax rate in the country, and California's corporate tax rate of 8.84% is the highest in the western United States and the 7th highest in the country. So the reason I preface my comments this way is not to complain, but rather it's imperative that we understand the landscape we're in when discussing tax expenditures that apply to our state's businesses.

Additionally, it's important to keep in mind that the business tax expenditures in California all had serious reasons for coming into existence. And prior to their enactment, all of these tax expenditures were considered, debated and worked on directly by the Legislature, who thought there were serious enough reasons to warrant their enactment. So when we turn our attention to California's tax expenditures and their effectiveness, I can offer a few thoughts today. First, tax expenditures allow California businesses to have some certainty when planning for their future.

Our state's employers can and have dealt with a difficult business environment in California, but what they can't deal with is an unpredictable business environment that doesn't allow for planning, hiring, expansion or success. Additionally, tax expenditures encourage businesses to engage in behavior they otherwise wouldn't participate in. But for the creditor exemption, for example, we've heard about it a couple of times today. The sales and use tax exemption for manufacturing and research and development equipment, which was put into place in order to remedy a double taxation issue.

Prior to the exemption, businesses were getting taxed for the equipment they bought to produce a product, and then they were getting taxed for the selling of the product. This caused businesses to produce products elsewhere in order to avoid the double taxation issue. Another example is the research and development activity in the State of California, which is robust thanks in large part to the R and d tax credit.

California companies performed more than $144.5 billion worth of R and D activities in 2018, which was nearly five times as much as the second ranked state for industry investment in R and D. Also, this credit not only applies to research and development activities like the lasers, the scales, things that go into the development, but also the wages paid to those engaged in the research are directly supervising or supporting the research activities.

Jobs in the sector have some of the highest wages in the State of California, and that's thanks in large part to this credit. So the reason why I wanted to highlight these two particular tax expenditures is because they're good examples of how California's tax structure discourages particular activity. But the tax expenditures remedy that situation and actually encourage business and employment growth, which otherwise wouldn't exist.

Also, I think it's important to point out that business tax expenditures make up a small portion of the fiscal impact that expenditures as a whole have on the state. From a federal perspective. In California is not too far off with this. About 90% of tax expenditures apply to personal income taxes, while 10% apply to business. So in California, according to the Department of Finance, personal income tax expenditures reduced General Fund revenues by $65.5 billion in 20222023.

In comparison, business expenditures for the corporation tax were an estimated $8.7 billion reduction, while the sales and use tax exemptions totaled $12.8 billion. So, in closing, these business tax expenditures were all designed for a purpose and a reason, and the Legislature thought there was a serious enough issue to pass each one of these tax expenditures. The tax expenditures allow California's employers to have the ability to engage in activity they otherwise wouldn't or they would be challenged to engage in without the particular tax treatment.

So this allows our economy to grow and provide good paying jobs to our residents while businesses can expand. So thank you very much for having me here today. I appreciate the opportunity and the consideration.

Thank you. Mr. Young, do we have questions from the panel.

Yes. Thank you, Madam Chair, I have a question for Mr. Young from the California Chamber of Commercial and really want to thank you, all the experts for your participation. I'm really impressed with your presentation, with a lot of detail and report. Really appreciate that. And according to the Tax Foundation, California rank near the bottom of the state in their annual tax climate index. So do you have any recommendation for improving our business climate so we can have more business or employer to our state?

Sure. Well, that opens quite a big box from a tax perspective, I think just keeping it at a high level, having the research and development tax credit come back uncapped, as it was for several years, because there was the concern of having a recession at the beginning of the COVID pandemic, reinstalling, that has been very important. That's brought a lot of development and research into the state.

But when it comes to certain tax treatment, keeping things as they are now, rather than threatening businesses or even threatening individuals who own the business or individuals who have built it up, such as a wealth tax, for example, anything that provides instability or the inability to plan into the future, that's what makes businesses shaky. So I think having security and definiteness, in other words, moving forward, allows folks to plan. Planning is key. So that would be the recommendation, is facilitating an atmosphere where you can plan.

Maybe it's good or bad, but at least you have the ability to rely on the system.

I really appreciate your answer. Thank you.

Assembly Member Petrie Norris.

Well, thank you all for being here and sharing your perspectives with us today. I think it's one takeaway from the previous panel and Mr. Euler, from your remarks, is that for obvious reasons, it's incredibly difficult to evaluate the efficacy and the impact of any one tax credit with a high degree of precision. And I think recognizing that, though we also know that this Committee and the Legislature, we are asked to consider a huge, wide variety of proposals, many of which seem to have merit.

So one thing that I would love us to be able to walk away from this hearing with is sort of a General framework by which we can evaluate tax expenditure proposals as we move forward, and would love to hear perspectives from each of you on what one or two of those General principles might be, both something that would characterize a tax credit or expenditure proposal that is pretty bogus and something that has merit. For example, Professor Shansky, I think you said narrow exemptions don't accomplish much.

So that was a General principle that I took away from. Your comments were very clear that we should be taxing final goods and things that are not doing that don't make sense. Other, I guess, principles and I guess just to make it interesting. So, Mr. Young, I think you start from the perspective that most tax credit proposals make sense. I heard. Sorry, Ms. Kitson, I think you start from the perspective that most tax credit proposals do not make sense.

So I'd love to hear, Mr. Young, your perspective on proposals that you think aren't sensible. Give us a General principle. And then, Ms. Kitson, if you can give us a General principle around tax credits and expenditures that you would support and think the Committee should support.

Okay. Would you like to start there?

Yeah.

Okay. And it's with tax expenditure, just to make sure I frame it appropriately. Tax expenditures that from a business perspective would not make sense.

Yeah. That actually aren't going to have a good ROI for the State of California and California taxpayers.

Okay. And sorry about the awkwardness of the microphone, but I guess I'll be staring this way, I suppose. Tax expenditures that don't necessarily encourage behavior. The but for question we talked about earlier, would behavior change but for this tax credit. So you see certain credits that want to encourage hiring of certain demographics of society. But maybe that credit doesn't necessarily incentivize a business to take somebody that was previously incarcerated or previously had military service or previously was unhoused because the credit is just not big enough.

Or maybe they want part time workers or contract workers. So I think the tax expenditures that don't incentivize behavior is the starting point from those that don't necessarily make sense because somebody at some point is going to reap the benefits of the credit. It's going to be an expenditure to the state, but it's not necessarily incentivizing the kind of behavior it was intended to. So I think that's the jumping off point for something that wouldn't necessarily make sense.

Additionally, if the pot or the cap on a credit is not big enough for all in that segment of the business community to reap the benefits of it, say, for instance, there was a proposed tax credit last year to put charging stations into multifamily housing units, and the credit pot was not very big. I think it was from the Department of Energy. And I apologize if I'm misspeaking on that, but that's the sort of issue where there's not enough there to incentivize behavior.

And so I'll stop there. But I think that's the jumping off point.

Got it. Okay. And that makes sense to me. So from your perspective, there are always, every year a number, just kind of countless proposals where, because they are very narrowly crafted, kind of run a risk of kind of just frittering away huge amounts of tax dollars without a meaningful impact. And so from your perspective, kind of larger scale, more meaningful programs are actually going to deliver a better ROI, return on investment for California and our taxpayers.

I think that's a fair way of summarizing it.

Yeah, that makes sense.

Thanks.

And Ms. Kitson, from your perspective, again, just kind of helping us think through some General principles perhaps that we can take forward as we consider proposals in the coming year. From your perspective, a General principle around a tax credit proposal or a framework that you think does make sense and return on investment for the estate?

Sure. I would think three principles that are coming to mind is, again, I talked a lot about the distributional aspects, which I think is critical to keep in mind. I think the opportunity cost is another one that if it is a huge proposal, we want to look at what else could have been spent with that money and connected to that. What does the research say about these types of proposals? Most proposals that you might be considering are things that may have been done before elsewhere.

So what does the research say about whether it's effective? If we don't know that it's going to be very effective, it might not be the best use of state funds when there are other programs that could be directly helping people in the state that are struggling with the high cost of living. On the distributional racial equity implications. There's not always data on, of course, we don't know exactly who benefits from given tax expenditures. There's no requirement to list your race on a tax return.

But I think it's important to look at data on what we know about the racial distributions of who has certain types of expenses. For instance, any kind of tax credit that rewards families that already have wealth may be less desirable than, say, a new type of expenditure that's going to help families build wealth. So I'll leave it there. Thank you.

Thank you. And Mr. Euler and Professor Trensky, I think you covered some of that in your opening comments, but anything that you would add before we move on to the next question.

Yeah, I mean, maybe to just add one additional thing that wasn't, maybe not the most important, but adding on to the comments that have already been made, one thing to consider is tax expenditures are just one way of achieving a particular objective. Right, or addressing a problem. The business community may come and say, we have this issue, we think we need this tax expenditure for this.

But you might think critically about, is there some way for some sort of expenditure program, a grant program, some other avenue that would have the budgetary oversight to achieve the same goal or similar goals, or are there regulatory changes or other things that achieve this? So just thinking tax expenditures aren't necessarily the only way of addressing some of the objectives that are the goals of tax expenditure proposals.

I would just go back to the breadth and basic public policy principles that in General, tax expenditures are spending and we should spend on things where there is a public good and the public good is going to be advanced. And public good defined technically, is where the private sector won't produce it. Right?

So right now, let's say in the context of charging stations, an area I know nothing about, but one might wonder, right, with gas prices and with the federal subsidies through the Inflation Reduction act, what's going to happen, right? Are we getting bang for our buck to create some additionality? And that's what I meant with the mortgage interest deduction as well. There are some areas where I think it's clearly likely, but they're templates that they're generally going to be broad areas and not narrow ones.

And I would just add with that as well, once you start going down this road, right. And obviously we're way down it. And you start giving tax incentives. Right now our tax code is porous, our rates are higher, our rates are higher. More businesses come and say the rates are higher, therefore we want more tax breaks. And so I don't know how to call a time out, but it begins to feed upon itself. Right.

We could have very few business tax expenditures and probably have a 7% corporate tax rate, and that would be the best thing economically for all California businesses.

Thank you.

Do you have questions?

Professor, thank you. Actually, you hit on my question: this back and forth between the argument that our tax code is the highest and tax rate is the highest across the nation, and then coming back and asking for tax expenditures. What do you think the best approach moving forward would be to mitigate that challenge because it's going to get to the point potentially where we have twice as much tax rate, and then we have twice as much tax expenditure, and that's not doing anybody any good. Right.

So how do we address that core issue?

That's a great question. Well, reaching far back into history, the 1986 Tax Reform act at the federal level dramatically cut income tax rates at the federal level and broadened the income tax base, and that was between a democratic congress and the Reagan Administration. So it is imaginable, right, that we could go through the list of tax expenditures, get rid of a lot of them, and reduce this. So it is possible to have this big reform in this context.

It would take a two-third vote to actually so I'm not sure how easy that's going to be. Certainly, I think being extremely skeptical of future tax incentives is one approach. And then I also do think that looking at the expenditures that are there and trying to maybe build consensus to get rid of the worst ones; creates more room to lower the tax rates or to give better tax or to give tax incentives in other areas that actually make sense.

And so, just to go back, because it's worth pointing this out: yes, the corporate tax expenditures are lower than the personal income tax expenditures, but the personal income tax taken in California is way bigger than the corporate tax taken. So, the corporate tax expenditures are a bigger percentage of the corporate tax base, and furthermore, the Water's Edge election was the result of bullying from the Reagan Administration in the 80s and was not a result of actual reasonable policy analysis at the state level.

Awesome. Thank you for that. Mr. Uhler, to go back to your presentation, you shared the example of the film industry that a third of those entities did business in the State of California despite not receiving the tax exemption. Do we have any data or insight as to why that took place, regardless, even though the argument was we would leave or we would not do business moving forward?

Yeah, I don't know about data, but I think that the general idea is that there are a lot of considerations for a production right on where they locate the film tax credit, or the availability of them is one of those. But I think that there's a lot talking about the availability of skilled labor or whether or not the location matches the kind of scene that they're looking for or whatever. So there's a variety of considerations.

The film credit is only one of them, and for some number of these productions, the availability or not of it is not enough to make them actually change their mind, and I think that general principle applies in thinking about all of these tax credits and maybe helps you think about, even when we don't have data or a study to think about the potential windfall benefits, thinking about questions along the lines of how much is this tax expenditure matter to your budget or to this particular situation?

If it's changing 5% of your budget, that might not really change your decision as much if it's 50% of your budget or your decision that you're thinking about. So, just a general principle there.

Right. Assemblymember Pacheco.

So this touches upon what Assemblymember Valencia asked about the film tax credit. How do we compare with other states with respect to our film tax credit? Are we at par with other states?

Yeah, I think the number is currently 37. So, the majority of other states have some sort of film tax incentive. I think we're somewhere in the middle, maybe like upper middle, in terms of generosity of our program compared to other states.

There are certainly other large states that offer more generous programs than ours in terms of some elements of our program that are; I guess you could say, less generous, or that we have an annual allocation cap that's only $330,000,000 of credit can be allocated every year. There's some states that it's almost an entitlement. There's no limit on the amount of the credit. There's other states that allow the tax credits to be refundable or transferable, whereas we don't allow that.

And so the claiming of it is a little less flexible. So there are some number of larger states where that's true, and then there are a lot of states that have smaller allocations and more restrictive credits than ours. So we're probably somewhere in the middle there in terms of the generosity, I guess.

Thank you.

Assemblymember Valencia.

Thank you, Madam Chair. And just one final question. We'd really appreciate the perspective from both Ms. Kitson and Mr. Young regarding this question. What would, in your perspective, be a better fit to address both of these challenges? In the business sector, would it be best to continue down this road of tax expenditures while potentially increasing tax rate or vice versa? Lowering the tax expenditure and then also equally lowering the tax rate. What would be most beneficial for the business sector?

And then, of course, also same question for Ms. Kitson. Thank you.

Well, again, we're pontificating here. So the thought's interesting. I don't know if it necessarily excludes or includes an inverse effect; if you do one and then you have the other. Professor Shanske is probably better to talk about than I am. But, yeah, you have a situation where you need to incentivize business, number one, to stay. We have other states that are actively poaching our businesses, and they're doing a very good job of it. What does that? Well, tax rates are one of them.

Tax breaks are another one of them. The ability to hire without all the implications that come along with it in California is another part of that. So whether it's the rates or the expenditures that have to be adjusted is difficult to say. But what I can say is some consistency is certainly necessary. So, if you start tinkering with tax rates, I think personally that would probably throw business into more of a tailspin than tinkering with certain tax credits.

Now, that being said, there are tax credits like research and development that are absolutely imperative to industries in this state. Pharmaceutical is one of them. Tech is another industry that relies on it heavily. So, I wish I could give you this is about as clear as mud, and I apologize, but my thought process here is stability and consistency are important. And messing with the tax rate as opposed to the expenditures, I think, might throw it out of balance, all things considered.

But certainly a discussion to continue.

Yeah, thanks for that question. I would go back to a lot of what Mr. Shanske and Mr. Uhler have said. I think, well, let me preface this by saying if you have seen our organization's work, we would actually argue that you could increase the rate and cut back on some breaks.

But if you're asking about keeping it revenue neutral, I would think that it would be more important to broaden the base, as Mr. Shanske has talked about, which could allow you to bring the rate down since a lot of these tax expenditures are really just benefiting certain industries instead of providing benefits for businesses as a whole. And I also want to reiterate that we're not necessarily talking about just getting rid of all the attack breaks.

Some of them might have some merit, but there are ways to look at scaling them back so that they are more better targeted and could free up some revenue to do other things.

All right, I just have; my colleagues have gone through a lot of my questions already. But for Mr. Shanske, you talked about the difference in the definition that you have of tax expenditures with DOF; you were talking about final consumption for that manufacturing tax credit. Are there other items that you see as similar to that?

That's a great question. I have to think more about it. But so the short answer is that there are other objects that things that should be in or out of the income and sales tax base for sure. So I mean, in general, the sales tax base, we should exclude basically all business-to-business sales. That would be what the sales tax theory would recommend. At the same time, we should include all final consumption. So that would be all final services as well as all digital goods.

The rough sense of what that would mean in terms of the sales tax base is it would actually kind of negate itself. Right now, again, there's a rule of thumb that about 40% of the sales tax base is business-to-business sales, but that we don't tax about the equivalent amount of our economy as well, that should be taxed, namely services, final services, and digital goods. So, that would be a structural change. That would probably be revenue-neutral.

There'd be winners and losers, but would make the sales tax more rigorous. So that's one example in the income tax world. We've talked about the Water's Edge election and other conforming things. There are other items of income that are not. I have it in a footnote, for instance. So, this has received a fair amount of press attention. But when you have appreciation of assets, right, that appreciation is not taxed even though you're economically better off.

For most of us, that doesn't really matter because we don't do much with that appreciation in our pension fund or our houses. But for the really wealthy, they can borrow against that and essentially consume and spend against that appreciation in economic wealth. And the assumption has been that that is hard to tax. It's not that hard. President Biden's billionaires minimum income tax is a proposal to do that.

So to the extent that we don't try to tax at least the appreciation of assets in the hands of the super wealthy when it's borrowed against and consumed, I would consider that a tax expenditure as well. So I think, given enough time, I can come up with a lot of them.

Right. And you already know that this committee now has the sunset and section 41 compliance policies. Is there anything else that we should do to provide better oversight for potentially new tax expenditures?

I think that the scrutiny you're applying going forward seems excellent. I think there's room for improvement, as Ms. Kitson talked about. But I think the real issue is all the stuff that's already baked in, that's going on autopilot. And I think the best thing the committee could do is to go and look at the things that are already going to happen and interrogate those the way we'd interrogate these others if somebody brought these proposals to you for the first time.

It's a problem because everybody's gotten used to that entitlement. Right. Going back is difficult, but I am very glad that we do have those sunset proposals going forward. You had talked about the potential conformity with the Trump tax law and what was in the inflation reduction bill. How much potential revenue would that bring in? Do you have any idea?

Well, the Department of Finance estimates that getting rid of the Water's Edge election, so bringing back in the shifted profits of big multinational corporations, would increase revenue by about 5 billion, subject to a million caveats. But that's the order of magnitude that the Department of Finance has estimated. Guilty is a federal provision meant to bring back that same pot of money. And conforming to the corporate alternative minimum tax would basically bring back guilty and a little bit more as well.

So I would put 5 billion as the ceiling for what those conformity provisions would bring and guilty as some substantial percentage of that, and the corporate alternative minimum tax, an even higher percentage of that. And getting rid of the water such election theoretically would produce what the...

I mean, this might not be exactly fair, but for Mr. Young, what's the argument against that conformity in the Water's Wdge election?

Well, federal conformity is something we do typically like, right? I mean, that is typically a good thing. In this instance, though, Professor Shanske, I appreciated how he put it earlier: bullying from the Reagan Administration. I appreciated that. When you look back at the history of the Water's Edge election, there were seven years of negotiations that went into that, that was debated by this legislature, and that was something that was considered, and it was considered to be serious enough to put that kind of policy into place.

And so it really depends on what kind of business community you're talking about when you want to have conformity to guilty as opposed to continuing on with the water's edge election. It's advantageous for some, it's not advantageous for others. So, I don't mean to skirt the question, but at the same time, it's just too unique to each organization to say it's an all or nothing approach.

All right, Ms. Kitson, I certainly understand your perspective, and we are big fans of EITC and the Child Tax Credit, but does a center account for increased economic activity? With some of these incentives and the potential jobs that brings to a community.

That is something to consider, of course; I think the big thing is that when you look at the research that has already been done on a lot of these tax expenditures, there is not super convincing evidence that they do meaningfully increase, lead to economic growth or job growth. We don't have a system of modeling the revenues, so we don't have any way to quantify that. But it is definitely something that we keep in mind, and I know that's an important consideration.

These things are very hard to measure, and most of us look at anecdotally my community. I know that, for instance, the California Compete Tax Credit did bring a lot of jobs to the companies that I knew of. And certainly, when you're talking about changing consumer behavior, let's say we're really concerned with climate change, I hear a lot of people, a lot of my friends talking about, "Hey, if I can get a big rebate for a heat pump, then I'll do that."

But I suppose those types of anecdotes are not data. It is difficult. So it is then my last question is for Mr. Young. California's educational system is already one of the best in the world, and we have Silicon Valley. Are tax expenditures focused on promoting innovation really necessary to maintain California's edge?

I think the answer is yes: it absolutely is, and the reason why is, that's the reason we've gotten to this point. There's a study done by the Milken Institute last year which looked at the research and development tax credit. It looked at how much research and development we do in the State of California. The multiplier effect that has the wages that we pay, it's all top shelf when it comes to those industries.

And I think by and large, it is because the behavior is incentivized by that tax expenditure. And so, yes, I think it's a good thing.

Thank you. And I want to thank all the panelists today. This was very informative, and you are free to return to your seats, but we would like to see if there's any members of the public that would like to speak.

Go ahead.

Hi. Good afternoon. Janice O'Malley. I'm with the American Federation of State County Municipal Employees. Really appreciate the conversation here today. Wanted to draw your attention to a tax expenditure that the legislature had passed last year was the Worker's Tax Fairness Credit. And this, for those who weren't in the legislature last year, was a refundable tax credit for a portion of union dues, allowing workers in low-wage industries who do not itemize or owe taxes to receive the benefits of the tax credit.

We are not seeking funding this year for the tax expenditure. But we're really hoping that in future years we can consider that. We believe that it really complements the recent tax policies enacted to benefit low-wage workers and families like EITC, the child tax credit, and the foster youth tax credit. So just wanted to make sure that that's back in your minds as you make your decisions moving forward because it really does make a difference with the rising gas prices and increased cost of living.

So appreciate it.

Thank you.

Good morning. Katie Hardeman with the California Teachers Association. Just want to say thank you for holding this hearing today and for the conversation. I think it's really helpful. We would just encourage you to continue to do ongoing oversight of tax expenditures and general skepticism of future additional tax expenditures. Just want to highlight for the committee: for every dollar that's provided in a tax expenditure basically takes about $0.40 out of our public school classroom. So, I just wanted to flag that for everyone. Thanks.

Hello, Anna Hasselblad with the United Ways of California and a proud member of the CalEITC coalition. I wanted to start by thanking this committee for holding this hearing and the staff and presenters for putting together a comprehensive review of tax expenditures. Often stated in the legislature is our budget is a reflection of our values, but only an examined budget will truly accomplish this value alignment.

As outlined in the presentation from the California Budget and Policy Center, only about 1-70th of all tax expenditures are directed at Californians with low incomes. We also know that tax credits directed at relieving poverty have an immediate and long-term positive impact on the families that claim them and their local economies.

Considering that California suffers from some of the nation's highest poverty rates due to living expenses, the more we can do to target and grow tax credits for households with low incomes, the greater the collective benefits for the entire state will be. We have an array of resources and critical budget decisions to make this year.

As bills move through this committee, we urge you to put first and foremost policies that help families that are struggling to get by, afford housing, childcare, et cetera, and that are proven to address the racial wealth gap. Expanding the young child tax credit and setting a minimum of at least $300 for the CalEITC are two compelling ways to achieve these goals and live our values in the state budget. Thank you very much.

Good afternoon. Zhon Go with the California School Employees Association. We represent a quarter million classified school employees throughout California, and our members are public employees, so they depend on state tax revenues to educate our kids, feed them, transport them, and ensure a clean, safe learning environment. We really appreciate this informational hearing to spotlight California's tax structure and expenditures, and we believe that corporations should not unfairly be advantaged at the expense of our public school students and public education.

So we hope that this committee continues to scrutinize every tax credit and tax deduction to ensure that they uphold California values and place California students and public education at the forefront. Thank you.

Hello. Sam Wilkinson, representing GRACE and End Child Poverty California, as well as the California Association of Food Banks, the California Alternative Payment Program Association, Friends Committee on Legislation of California, the Children's Partnership, the California Immigrant Policy Center, and First Five California. Thank you all for this hearing today and for all those who have testified.

We urge the legislature to look at all available revenue options to close loopholes and ensure wealthy corporations and individuals pay their fair share, not only to address the potential budget problem for the upcoming year but as permanent opportunities so that California has the resources to fund programs proven to build prosperity and advance a future free from poverty we know is possible.

Instead of spending on large tax breaks that benefit those who have historically had access to wealth, prioritizing refundable tax credits targeted at Californians with the lowest incomes, such as the California Earned Income Tax Credit and the Young Child Tax Credit, helps close the state's enormous racial wealth gap and moves us closer to an equitable California.

We commend the bold steps this legislature has taken to build out refundable tax credits and hope the spirit of investing in Californians who will be impacted most by the budget downturns and who have been historically excluded from wealth-building opportunities will continue. Thank you.

Thank you, Madam Chair, members of the committee, my name is Kristina Bas Hamilton, and I'm here today representing the Economic Security Project Action, which is an organization that works to build an economy where all Californians can thrive. And we want to align ourselves with the comments from Ms. Kitson, others who've come up here.

We think the best way to approach this is a systems lens, and if the system has disparities baked into it, going back to the origins of how these systems were created, it's incumbent on the legislature to start viewing how we can dismantle and recreate these systems so that at the very least, we have fairness. And one example among the many that came up was that we should treat tax expenditures as spending, yet we don't.

Spending on social programs, spending on education gets scrutinized every year through the budget subcommitee process, and we have to fight tooth and nail to increase that spending. And the minute the economy drops that spending is targeted for cutting by the governor and finance and everyone else. Yet tax expenditures, which are also a form of spending, you need two thirds vote to be able to change those. And guess what?

They're not reviewed in the budget, and they are generally under the radar, and nobody really even knows that they exist for the most part. That's a baked-in disparity. That is a serious problem that, again, looking at this from the big picture, let's start changing our systems and processes so at the very least, we have fairness. Thank you.

All right. Thank you. I want to thank everybody that joined us today, our panelists, the audience that came to listen to this really important subject. And I want to thank our staff, too, that worked very hard to put this all together and all the members that joined us today. And with that, the informational hearing of the Assembly Revenue and Tax Committee is adjourned.