Assembly Budget Subcommittee No. 4 on State Administration

Test, test. Budget Sub 4 will be meeting in room 447. I am requesting the Members of the Committee please report to room 447.

We will be starting our Budget Sub 4 Committee very shortly, in about two minutes. If staff is watching, please let your Members know to report to room 447. We have a feisty, very encouraging budget hearing room. Folks waiting to talk about the budget. Good times up ahead. Am I right? Yes? All right.

Good afternoon, and welcome to our first hearing of 2023 here in Subcommitee 4 on State Administration. I would like to welcome our new Subcommitee Members as well as welcome our new our veteran Members of the Subcommitee. So welcome to the Committee, Assembly Member Lee, Assembly Member Reyes, Assembly Member Patterson, and welcome back, Assembly Member Wicks. Today in room 447, the panelists on the agenda are appearing in person. Yay, in person.

We are accepting public comment at the end of this hearing, both in the hearing room and on the phone. The phone number to connect is on the Committee website and should also be on the screen if you are watching over the Internet. The phone number toll free is 877-692-8957. The public access code is 131-5447. If you encounter any problems, please contact the Assembly Budget Committee at 916-319-2099 and a staff member will assist you. We encourage the public to provide written testimony before the hearing. Please send your written testimony to Budget Sub 4. That's the number 4. Budget Sub 4 @ ASM dot CA dot gov. With that roll call, please.

[Roll Call]

Thank you. And we have two items on the consent calendar. Can I get a motion, please? We have two items on the consent calendar. Great. Thank you. Roll call, please.

[Roll Call]

Excellent. Let's begin with our first panel, which is issue one, an update on the IRS tax relief. We are hearing from two departments today. We will begin with the Franchise Tax Board. When you begin and when you speak, if you could introduce yourselves, please, and your department.

All right. Good afternoon. My name is Jeanne Harriman with the Franchise Tax Board. So thank you for the opportunity to speak for the committee today. So let me jump right in with the update on the IRS tax relief. So generally, tax returns are due on April 15, with an extension to October 15 each year, with these dates being subject to change if those dates fall on a holiday or a weekend.

These dates can also change based on a designation of a disaster, such as a tornado, blizzards, fires, et cetera. When a locality is designated as a covered disaster, generally by FEMA, the Federal Emergency Management Agency, the IRS can later recognize and grant delays to these counties and these residents of the counties for their tax obligations. In late December, early January, as you know, the majority of the state was hit with multiple atmospheric river storm systems, which caused significant issues across the state.

The governor declared a State of emergency for the entire State of California, and FEMA eventually began declaring counties as covered disaster areas, which made them eligible for some level of federal assistance. The IRS followed suit and provided relief to affected residents of these counties, and on January 10, 2023 the IRS announced an extension of time to file returns until May 15, 2023 and also extended the time for paying estimate payments as well.

On February 24, the IRS extended this relief further, proposing that all due dates for tax returns and estimate payments would now be October 16, 2023. Over the course of these storm systems, FEMA declared 51 counties of the 58 counties in the state a suffering disaster that triggered some sort of federal assistance under the FEMA guidelines. Last Thursday, California announced conformity to the IRS extensions of time.

Since that time, FTB has been working on various media campaigns focused on counties that are eligible for, and also including counties that are not. While COVID-19 covered the entire state, in my career at FTB, I have not otherwise seen a disaster situation where the vast majority of the state, but not all, has been declared a disaster area.

Thus, FTB is now engaging in not just a media policy campaign to alert people in the areas that are impacted, but also to make sure that those residents that are not in these areas still understand that their filing obligations for tax returns and payments are due on April of this year, if not later, for estimate tax payments. One last point to make is to note that we continue to encourage everyone to file early.

Both the IRS and FTB are accepting tax returns and particularly for those seeking a refund, they should file at their convenience. At this time, I'm happy to answer any questions that you may have.

We'll Reserve questions till the end of the panel. Can we have the next speaker please, the LAO office?

Sure. Thank you. Thank you, Madam Chair. Brian Euler from the LAO from the budgetary perspective, one of the key impacts of the deadline shift is that it will create additional uncertainty for the legislature as it moves forward with the budget process and tries to kind of craft its final package in June.

Just to give you a sense of that, when we're thinking about trying to make an estimate of the current year tax revenue collections in a normal year, when we have that information on the collections around tax day in April, we can usually pin down that current year revenue number within a few $1.0 billion. Without that data, we think that the uncertainty increases to plus or minus $10 billion or more.

So you can see that it's going to be much more difficult for us to say with certainty not just how much revenue there is, but what is the sort of overall budget bottom line that the legislature is trying to solve for as it crafts its final budget deal.

Thank you, Department of Finance.

Thank you. Colby White, Department of Finance. So in addition to the comments by Mr. Euler about the increased forecasting uncertainty, I will add there's one other impact to the state, and that will be the shifting of the cash from earlier months to October. So as of the Governor's Budget, we had included in our cash flow assumptions. We assumed a shift to May, but this event occurred subsequent to that.

And so we have run an internal estimate, and we currently estimate approximately 35 billion will be shifting from earlier months to the month of October. So to put that in context, we're not expecting that to affect the state in a way that would negatively impact the state in a way that would increase short term borrowing or require that, or the use of any other budgetary solutions.

As a result of strong reserves and prudent budget and cash management in the past few years, the state currently estimates to end the current fiscal year with cash and unused borrowable balances of approximately 125,000,000,000. So under current projections, we think a $35 billion shift is manageable. And then lastly, I'd like to note also what this will not we do not expect this to significantly affect budgetary revenues.

So, similar to when the tax deadlines shifted in 2020 and you saw shifting into July of 2020 in the heart of the pandemic, those revenues, even though they're collected in the subsequent fiscal year, will be budgetarily scored in the prior fiscal year when the tax was initially due. So, for example, an April payment will shift to October, but it'll still be counted for Prop 98 purposes, Prop two and all that. It'll still be counted revenue wise in fiscal year 22-23. So we don't expect a significant impact from that as well. Thank you.

And to be clear, Mr. White, that was 35 billion with a B, correct?

It's a B, yes. And that's a point in time estimate we've done internally. We will be updating as part of the May revision process, and we'll be looking at this again, and we will have a new estimate at that time.

I want to take a moment to open it up for questions from the committee. Ms. Reyes?

Thank you, Madam Chair. When we talk about 51 to 58 counties, how many individuals and businesses are we talking about? Is it still the greatest majority? Because not everyone is going to file late.

It's 97% of the population. So those 51 counties are quite the populous counties. So, yeah, it's 97% of the population.

And something that occurred to us as we were preparing for today is how do individuals and businesses take advantage of this eligibility? They just file late.

Yeah. So that's a good question. So really, the only marker that we have at this point to study is the delay of the January 17 estimate tax payment. We did find that there were people who continued to make it, but the majority have delayed their payment habits or liabilities until what was then May, but is now October. So we're still waiting to kind of understand how many folks would take advantage of this.

Of course, it is obviously known that refund fathers are coming in now, and we would expect that. And we appreciate that. So that we don't have a huge backlog in October, but we're probably about a month out from being able to understand true behavior patterns, particularly for those taxpayers that will continue to make estimate payments and file returns with balance dues.

Very good. And then my last questions going back to the shifting of cash from the earlier months to the later months of 35 billion. I understood that, but I'm not sure that I understood from the Department of Finance that you still see a surplus of 105,000,000,000 at the end of the year, or did I mishear you?

Yeah, let me clarify. So the current cash flow projections, which were completed for the Governor's Budget, that did not include this. They included a shift to May, but it did not include a shift to October. So those projections were that we would have cash and unused borrowable resources at the end of fiscal year 22-23 of 125,000,000,000. That projection will change now. So we're going to have a significant shift.

But that gives you the idea of what we were expecting to end the fiscal year with now. There will be new revenues, different expenditures, and, of course, this shifting that will lower, that will most likely lower that number. But under current projections, if you compare the 35 to the 125, you can see that absent significant downward revisions, we expect to be able to manage this.

We do expect to be able to manage this. I'm sure we will. Thank you. Thank you, Madam Chair.

Mr. Patterson.

Thank you very much. What's 35 billion amongst friends in terms of how projections are going to be made? Because obviously the budget has to be approved before then. Although when I was a staffer here, budgets sometimes went until October. How confident are you to be able to make those projections on income tax moving forward?

Well, I would echo the comments of Mr. Euler earlier. This certainly adds a higher degree of uncertainty for the upcoming may revision and budget act forecast. So at that time, we would normally have much more complete cash data related to April. That's a significant month. We typically receive 15% to 19% of personal income tax collections in April. This year, it'll be a lot less, around eight or 9% maybe. But that said, we will still have new data. We will have personal income tax withholding data.

We will have sales tax collections that are not impacted by this. We have, as part of our normal forecasting process, there is already a great degree of uncertainty. We have a progressive tax system. We have high income tax. We have 1% of our population paying 50% of the taxes. So just to high level. Answer your question.

It just layers on another level of uncertainty, particularly with the current fiscal year 22-23 because that's the one that normally we would have a much more complete picture by the time we do the budget act forecast or the May revision forecast.

Okay. All right. So what's the LAO's thought on. I'm on a few budget subs and obviously the main one, but we're going to be talking about whether we have, let's say, 100 billion, 105,000,000,000. It's a little bit of a gap. Right. And so what's the LAO's thought on how these projections are going to work out, and how are you going to handle that in these subcommittees and telling people when the budget comes together? Because we're deciding on cuts essentially everywhere. Right.

Yeah. So in General, one of our high level comments for the legislature has been we have a few kind of as moving forward through the budget process. Now. One is that we kind of commended the governor and his Governor's Budget for putting together a package that didn't yet commit any of the state's reserves and that we suggested that that provided the state some additional flexibility moving forward to deal with some of these uncertainties that are being amplified by this problem. So that's one piece.

Another was that we did suggest that as the legislature moves through the subcommitee process it consider identifying other areas where if we get later in the year and it becomes more apparent that we might have more of a revenue shortfall than we anticipate right now what are some additional areas where reductions or maybe kind of spending triggers as the governors propose could be expanded. So that's kind of some of the main recommendations we made from kind of a bigger budget picture perspective.

Thank you. Mr. Patterson you may serve on three different subcommittees in budget but so far is the most fun.

Well I think, yes I agree. The chair, we have such an excellent chair of this subcommitee. I'm looking forward to this one.

Thank you. Thank you. We're going to move forward with issue number two and that's an update on the middle class tax rebate. Let's begin the.

All right, so again, Jeannie Herriman, chief financial officer at Franchise Tax Board. Good afternoon again, and thank you for the opportunity to meet with you today and for raising questions to support our discussion on the middle class tax refund. First, I want to share a little bit about the program's status and some of the decisions made as the program was implemented and that have created some of the issues we are working through today.

In this introduction, I'll be answering various questions that we are commonly referred to, so I beg your indulgence. So, speech is about six minutes, but I think it's going to give you some great information to inform any questions that you might have further. So, as of January 13th, 2023, FTB noticed that we were done issuing first time payments, and at that point in time, we've issued more than 16.6 million refunds distributed to taxpayers representing almost 32 million Californians and totaling $9.2 billion in direct relief.

While we are still working through these issues, we'll discuss these today. Franchise Tax Board and Money Network has accomplished this program within the parameters agreed upon to during legislative discussions, also described as get the payments out quickly, get them out in a secure way, and get them out accurately and with minimal fraud. As noted on our website and as previously indicated, almost all first time payments have now been issued.

Some additional stats that you may be interested on that are solely focused with the debit cards that we issued. So at this point in time, we've mailed out over 9.6 million debit cards for a total value of $7.7 billion. Today, 4.2 million of those cards, about 82% have been activated, and of those activated, 2.9 million have been fully expended, for a total of about 38% of the cards issued, activated and spent, down now to a zero balance. So we are making steady progress that still remains.

There's about $4 billion out on cards that still need to be spent down by consumers and cardholders. While we've met the commitment for this program to date and are celebrating that success, we also recognize that not all has gone unexpected and or that there's room for improvement. So how do we get here? I previously mentioned the expectations established during legislative discussions and all decisions made during program implementation reflected these decision points. A common question raised throughout the program is why debit cards?

For the Golden State stimulus program, FGB, issued direct deposits and warrants. However, if the middle class tax refund program had relied on that, we would have been issuing direct deposits and warrants late into the summer of this year. Summer of '23 due to limitations of the state's financial systems, many felt this was unacceptable and we agreed.

The state pivoted considering the use of debit cards when the program was still focused on as a gas tax rebate and when DMV was the potential entity to administer the program. As early as June of 22, while legislation was still pending, DGs began a competitive procurement process for debit cards to be used in the finally agreed upon program. Money Network was the selected vendor. They were one of 21 entities expressing an interest and one of five that actually applied to do this work.

Money Network was the only vendor that had indicated that they could provide FTB or the State of California any chipped debit cards, EMV chipped cards, which is a security feature that we were definitely interested in.

However, during procurement discussions, it became readily clear that there were supply chain issues with those cards, and if we insisted on implementing a program solely with the use of those EMV chipped cards, it would have been December of '23, if not into early '24, before sufficient supplies were estimated to exist that could fully facilitate this program. Again, many felt this was unacceptable and we agreed.

One significant program parameter the state did not anticipate with the use of debit cards is the fact that those taxpayers who are having trouble and usually call FTB or your teams could not freely assist as we are used to doing. And so why is that? A debit card is a financial instrument and it's personal property under the State of California's and national laws.

And that means that basically whoever is the cardholder needs to call and rectify any situation that has occurred on that card and that has stymied both some of your staff and FTB from providing the assistance that we're used to. However, we are finding ways around that to make sure that taxpayers, cardholders are able to get the assistance that they need. So let's take a minute and talk about some of the program resources and potential fraud in the program.

So, customer service, one of the big issues that we hear a lot about and that we're still working with today, but there's also some good news on that, too. So let's set the stage and take a step back and understand that we've issued over 9 million debit cards in an 11 week period. So in essence, in order to do that during any week, there was about 3 million cards that were all called in flight, which were mailed in, the mail being activated or being used.

And when people need assistance during any of those phases, they were calling in for assistance in mid January, when we were at the height of the program issuance, customer service channels managed by money network under their contract with us, were dealing with almost 330,000 calls a day on two dedicated phone lines.

Happy to report most of those calls were actually being addressed through the interactive voice response system, also called the IVR, meaning taxpayers were able to get questions or activate their cards or answers to questions just by using the automated service on that line. But for people trying to get through to an agent because they needed to, it was a bit of a struggle.

So understanding that struggle, understanding the unacceptableness of that struggle, FTB engaged in certain actions that have assisted calming the call center, as well as the passage of time, which has helped to calm the call center. FTB asked money network to add additional staff to the phone line. We expanded the call queues so that people, when they were calling, they just weren't getting disconnected or hearing the phone ring. They were actually able to get into a pattern of holding for an agent, which is a big thing.

And then we had them redirect staff to focus on the primary line as opposed to equally distributing the staff between both lines. And then finally, we asked them to extend the hours on the primary line until 10:00 p.m. During the weekday, which also helped tremendously. So today, the good news is that calls are down about to 100,000 a day between both lines. So about a third of the capacity that we were seeing in January when we were at the height of the program.

So that's good news. Levels of access continue to be at a very high level, and taxpayers continue to get the assistance they need. That doesn't mean that it's a seamless experience or that it's an easy experience just yet. But we are continuing to work with taxpayers and cardholders and your staff as well to try to make it as easy as possible to get a hold of Money Network to engage. So, fraud. Let's talk about fraud.

It's another key concern that's reported on extensively in the media and that you are dealing with on the front lines of the program. FTB and Money Network are diligently watching fraud stats and conducting investigations into events reported. I know it may be hard to appreciate, but considering the magnitude of this program, over a $9.2 billion program, the fraud rate observed is extremely low and significantly less than the established program metric of 1%. So the 1%, where did that come from?

The 1% is an industry wide program metric that's associated with like programs. So other programs like the EIP, the Economic Impact Payments that the IRS issued or other statewide programs of this nature, typically a 1% is the expected outcome metric and what has proven out as those programs have been implemented. So, all right, so that's where we're at on fraud, and I'll let you ask any additional questions.

Again, one of the things that we have been asked over and over again is why can't you tell me what it is instead of just telling me that it's less than 1%?

So as we continue to work with our partner Money Network, as well as law enforcement and our own investigative staff, one of the things that they are very quick to remind us, as is, as in any law enforcement investigation, the last thing you do while an investigation is pending is tell the public what you do or don't know because that can actually harm the investigation that's pending or actually harm the program. So we have taken that to heart.

And typically all of our conversations when individuals have said, hey, what is the fraud rate on this? Is we have continued to speak to the fact that it is significantly less than 1% of the program metric is required by the contract. So one other final thing that has also been relevant to many discussions under the terms of this contract, Money Network is responsible for the fraud loss perpetrated against this program.

So we also want to be very careful that we are managing this program well to ensure that we're good partners with Money Network. And then last but not least, the other part of a question that we have dealt with quite frequently is the misperception that when fraud is perpetrated against a taxpayer, that that taxpayer is the one left holding the bag. That is absolutely not true.

I can assure you that fraud will be investigated and fraud will be concluded or resolved and the taxpayer will be made whole with any payments that are due to them. So a couple items, really quick next steps. So I think all of you tracked that the IRS, while they did not indicate that this rebate program was a non taxable event, they didn't indicate the taxability of the payment itself.

They did tell taxpayers in California, we're not going to challenge if you don't put this on your return. And so that is very helpful advice, although coming very late, but it is helpful advice. And so we have so begun noticing taxpayers, as has the media. We are still waiting for the IRS to tell us how folks that had filed their return and reported this as income prior to the IRS announcement can amend their return or modify their return to strike that payment.

So we are still waiting on that march through May. We're also going to be issuing reminder letters, and there are about 2 million people that are on target to get a letter from money network that basically says, hey, you haven't activated your card, you've received it. Or, hey, you have activated your card but are no longer using it in a standardized pattern. And we'd like you to just remember you have it and engage, activate, and spend.

So those letters will be going out to those individuals, March through May with the hope that we can continue to get these card balances down and into the hands of Californians that so desperately need this money at this point. Thanks for your time and for listening, and I'm happy to answer any questions that you have.

Thank you very much. We'll go with the LAO, followed by the Department of Finance.

We have nothing to add on this item.

Thank you. No additional comments from finance as well.

Thank you. I do want to just a question, because it's come up a lot that some Californians that received the debit card, what does the actual envelope look like? Does it have the FTP logo on the side or is it blank? Do they know what they're receiving?

Yeah, so that's a good question. So let me give you some background on that. One of the things that we were challenged with from the get go was that the envelope, which is a white envelope that has a Nebraska return address for money network in the corner and then sprayed onto the envelope itself as red wording important information about your middle class tax refund. And so two points. One is why Nebraska address? Right. That was confusing to people.

People thought it was fraud because it was coming from Nebraska. Right. And so it goes back to the procurement of the 21 entities that expressed interest in bidding on debit cards for this program. Not one of those 21 companies had headquarters in California or infrastructure in California sufficient to do this program network, the entity that was the final winner of this project per se, their mail distribution system and their card printing systems, et cetera, are all in Nebraska. And that's where that Nebraska address comes from.

And so lessons learned. Money Network was also the entity that facilitated many of the debit card payments under the federal economic impact payment. And so lessons learned from that. First, I'll just say rodeo with the IRS and Treasury on that was what the envelope looked like was important and making sure that people knew in advance what the envelope looked like. Right. And that's why both FTB and Money Network have on our websites pictures of that envelope. So the envelope design itself.

So the first one that Money Network sent out for the EIP payment program had nothing on it, was just a white envelope. And the destruction rate was very high on that because people did presume that it was fraud or just junk mail. And so lessons learned. They ended up spraying specific wording, much like is what is on the MCTR one, excuse me, MCTR is middle class tax refund. And they saw the destruction rate or the rate of people throwing it away dramatically drop because of that.

Right. Not perfect yet, but dramatically dropped. And so we use that same principle within our program. We still do know that people are throwing it away. Right. But we're trying to get them familiarized with what it looks like. Same thing with the reminders, letters going out in March to May. They'll be in the same envelopes again, pictures on our website. And so why doesn't it just say, hey, open me, I'm a rebate, I'm a card, spend me down, et cetera. Right.

Because the fraudsters, of course, are watching for this, right. And so we want to make sure that, again, a security protocol is in place that even if the fraudsters can tell what the envelopes look like, it's just that much less advertising that this is money that's going through the mail system. And so that's why it wasn't chosen to put on the outside of the envelope that, hey, here's your money. Spend it wisely, whatever you want, but spend it please.

So hopefully that helps answer your question with some perspective.

It does. Thank you. Any questions from our Members? Mr. Lee?

Thank you. And you've heard me before express a lot of concern about the program, the debit card program. And I'm going to ask a couple of questions. I want to elucidate. Why is this so important? Is this is the second time in California history where we have as a state, directly reimbursed the taxpayer, directly given people back money. And it's a real shame that when we kind of screw up, giving free money to people is a big downside. Right.

When the residents of California really need that money. I think learning from our experience with Bank of America the first time where it was a really not great experience, it really shocked a lot of the membership to know that we went debit card a second time with the kind of experience we had the first time. I just wanted to clarify something you said is that you said because of the supply chain issues, right. So not all the cards were going to be chipped.

So does that mean that all 9 million plus cards are sent out with no chips.

So there are a portion of the cards that have chipped. Right. And again, as a security measure, we have not published how much that was. Right. But there was a good portion of the cards that were chipped that were issued, and then the remainder were not chipped, but they did have a magnetic stripe.

And so one thing that might be helpful, too, as you understand the value of the chip, when you are in person and you are using that card correctly, meaning you are inserting it into the system, you're not tapping it, you're not swiping it, because neither of those will trigger the controls in place for a chip. You have to insert the card. Right, and you have to put the right codes to get that advantage.

Again, when you look at the volume of chipped versus not, it is important. I wouldn't say that it isn't, but it also is understood is when you do an online purchase or when you tap, which is a contact like purpose, both of those are pretty big in nature when people do online shopping. And the EMV chip means nothing in those settings.

The only time the EMV chip provides protection is when you're using it in purchase, in person, and you are dipping it, inserting it, and the vendor is recognizing it correctly. So online purchases, if you swipe it, if you tap it, or the vendor merchant doesn't code it correctly, the EMV chip does not offer the protection that it could otherwise do it. Right. So again, it depends on how consumers are using it and how they're purchasing things. Anything that's not in person that EMV chip doesn't.

Sure, but I'm just saying because it's a largely industry and international standard now of security, and we don't discriminate how people want to use them, whether they use them in a store, whether they use them online, it's money for them to do. It's important as a security backstop because that was also one of the big concerns we had with the bank of America cards.

And also, I know you talked about how if everyone had direct deposit, it would take until summer 2023, but then how is it determined that 7.2 million people got the direct deposit and why did nine other million people didn't get the direct deposit?

So. Good question. So within returns filed on an annual basis with us, we give the taxpayer the option, give us your bank account number, and we'll direct deposit your refund or take out the money that you owe us, as long as you fill out and sign in everything or don't give us your bank account information and we'll mail you a check. And so that is basically the bottom line answer as to how we determine who got a debit card and who got a direct deposit.

Anybody that has given us that account information with their 21 tax return, we attempted to give a direct deposit, and as long as that account was still open and the vestiture of that account had not changed, the money went in.

So none of the 9.6 million people ever signed up for direct deposit.

Correct. And then there's a handful, a couple hundred thousand, where direct deposits failed because accounts had been changed, and we moved those over to debit cards too.

And also, I know a lot of the customer service side now is handled by Money Network, a private entity. So how much money did we expend to Money Network to take over all the services? Right. From the printing, the customer service. And I would also be interested is did we give additional money for their additional level of customer service capacity?

Yeah. So, good question. So the total contract with money network was just over $25 million. $25 million was the contract value. Just over that. What we did with Money Network, and that included all services. That included cards, printing, acquiring the cards, printing the cards, mailing the cards, doing the customer service, and also issuing the 1099T that they facilitated with us as well. These prices were not designated in the contract. It was like a $135 a card or a $165 a card.

And we'll do all of that for you. Right. So I don't know how much of it was for mailing and how much of it was for customer service, et cetera.

However, that being said, as we entered into the period where customer service was becoming deficient and we needed to do something, it just was not acceptable not to react while I was willing to entertain the ability to pay them more to do it within the terms of their contract, there was also additional cards in there because originally we had contracted for a minimum of 11, up to 13 million cards, and that's where the $25 million came in. They will not issue more than 11 million.

So there was technically funding on that contract that we utilized to cover their increased customer service levels that we're doing, and also increasing some of their fraud resources and other things that we've asked them to do, like when they extended the customer service line hours and when they increased staff, because they did both. And so there was no additional funds added to that contract. But within that 25 million funds were used differently than originally expected.

Okay, well, I appreciate you explaining the thorough journey of decisions you had to go through with this, but I really do hope that Administration does not go for a third time down this route. Thank you.

Ms. Reyes.

Thank you, Madam Chair. First, I know this was a huge undertaking. There's no question about it. You've delivered this middle class tax rebate to over 40% of all Californians. We get the enormity of it all. We're California. We should expect to do things in a different way. We should have learned from what happened with EDD, with B of A. And so it isn't necessarily to you, but to the Department that there have to be lessons that are learned.

And I appreciate what my colleague has talked about. If we're trying to figure out what we're going to do next time, because there will be a next time when we have to do something similar and deciding whether we send a check or whether we send a debit card, that is one of the questions that has come up a number of times from my constituents. I don't know what the answer is.

So that would be my first question to you, is, why did we send debit cards rather than checks?

So, good questions. In the imperfect world that we're trying to make decisions in, and timing, not always being a friend, it's challenging to understand the full trade offs that are being made. So debit cards were the preferred route for speed.

At the end of the day, it was about speed and getting these out, because, again, as warrants, if we had moved all of those individuals that hadn't given us a bank account information to a warrant, we would have literally been into the summer of '23 before we could get it done.

May I interrupt you for just a second? I don't understand how it can be easier to print up a debit card and a letter with all the instructions. Set up a debit card versus ordering a warrant where you have an address for this person you're going to send the warrant to. It has the money to back it up, and you mail the warrant to the individual. Please help me to understand that so that we can then tell our constituents.

Yeah, I'll give it a shot. I don't know that I have the perfect answer to that either. I do know that when we did warrants for the Golden State stimulus program, the maximum amount that the statewide systems FI$CAL and the SEO's systems for distributions of funds was $200,000 a week that they could issue. And that's why you see that going out. We actually crashed FI$CAL during the GSS program because we did not know they had this limitation. And we were issuing like, 300,400,000 a week.

And we actually crashed FI$CAL for the entire state because we were trying to send such a huge file transfer through them and they just couldn't do it. Right. The limitations on issuing debit cards is $1 million a week through the financial entity services. Right.

So you can see just by that direction, if the state is able to bolster their systems to eliminate that restriction of 200,000 a week and then can get up to the million a week, then they can be just as incompetent as to speed as the debit cards. Right. But that was an absolute hard barrier staring us in the face with using warrants. Right. There were some paper issues at that point as well.

I know with GSS, we actually ended up holding warrants another three months because they were waiting for paper stock to come in. One of the things that is, we use special paper for GSS because in the legislation it said these payments are not subject to offsets or levies. Right. And so the warrants could not be on the normal SEO paper because banks would not know that this was a payment that was not able to be offset.

And so there was special paper stock that was purchased by SEO in order to facilitate these payments so the banks could visually see, zero, this is a pink check as opposed to a green check. It's supposed to go into a taxpayer's account and not be levied or offset. Right. And so all of these decisions, they're good policy decisions and they don't seem to be impactful.

But when you actually sit down and try to administer and how do you make sure these things don't happen, and how do you make sure this thing happens as fast as possible? Those are things that keep coming up as like, oh well, you can't do this or that. So hopefully that helps a little bit understand why warrants were the slower process. Right. Lessons learned.

Again, I don't know that much about EDD and B of A. I just know in our program, when we talked with money network as well as DGs, talked with all of the vendors that applied, we did try to say, this cannot happen because it happened with EDD, this cannot happen. And the vendors were each responsive to say, that won't happen because I'm doing it this way. Right. And there weren't peer responses, but there was an analysis done during the procurement to try to avoid a repeat.

And let me just say, I know the facts behind the situations. You know, the less than 1%, we are dramatically different behind the scenes in EDD. And eventually, as we get the money off the street, off of these cards and we start seeing some stats. It should give you comfort that we didn't repeat the EDD situation and the bank of America situation here. But time needs to pass in order for us to give you that comfort as well.

I hope that we will be able to, either in another hearing or in some format, to be able to have a frank conversation about lessons learned. It isn't a gotcha moment.

We've got to be better. We are California. We do have to do better and we have to learn from whatever it is that did not work or worked poorly. So that when we do something next time we can say, here's what we tried, didn't work. Here's what we tried. We learned this. And we learned this.

My two comments, positives, is that I'm glad you're going to be sending a reminder to all of those who received a card telling them they got a card and if they don't have it, to reach out and the other that with this issue of fraud, the number is so small. And I appreciate that. And the most important thing that you said is taxpayers will be made whole.

And I appreciate you.

Yeah, thank you.

And we are very happy to engage in lessons learned conversations as well. Happy to do so.

Thank you for that. I think a less than 1% fraud measurement is an incredible achievement by any department that had so little time to one find the contract and create this program. We did raise it. I want to let the Members know.

Our budget chair, Mr. Ting and myself did raise it when we were putting this program together that we were concerned about lessons that we had experienced related to EDD and other programs, especially with debit cards that did not work in relations to Mr. Lee's point, Bank of America and EDD. So the issue was raised. It was a priority to the Governor, as you recall, when we were finalizing the 2022 Budget act. And so now we're in this moment and want to figure out what happens next.

I do have a question for you in terms of timeline. So out of the percentage of debit cards that have not been personalized or have not been received by the taxpayer or were thrown away or have not been completely fully utilized, is there a timeline as to when those funds will expire and go back to the General Fund?

So great question. So by statute, the program goes, it's mentioned that by up to April 30th of 2026 is when funds can be replaced or issued for the first time. So like, say somebody loses a card and the funds need to be reissued. Technically, under the wording of the statute, without an in depth review, it would be April 30th of 2026, when that could be resolved. And then May 31st of 2026, everything comes back to the state that has not been expended.

May what? I'm sorry.

So May 31st of 2026, under the current statute, it says all funds that have not been expended or returned to the state. So there is additional work that needs to be done on that requirement where it concerns activated cards. Because, again, a debit card is a piece of personal property that everybody owns, right?

Once you activate that card, if you've not spent it, the question remains for review whether or not that is able to be grabbed by the state and returned to the state, or whether that goes to unclaimed property. So we're still in discussions on what that means, but the statute seems to suggest that it would just come back, lock, stock and burial to the state. Okay, so if the card has never been activated, it is clear that that money will come back to the state.

Okay. But the question right now is also the ones that have been partially used. What happens after? Okay, good to know. Thank you for that. And just as a gentle reminder, I want to restate some information. In 2022, the budget act established the Better for Families act to provide approximately $9.5 billion of payments to low income and middle class Californians.

In an effort to relieve economic disruptions related to COVID-19, the high cost of gas, groceries and other necessities, individuals were issued a 1099 that is no longer needed to file your taxes. So if you are a very low income Californians who is reliant on public assistance, that is not going to jeopardize your opportunity or eligibility to continue to receive those benefits. At the time of this program, we were unsure where the IRS was going to land on that.

But now, with full clarity, we know that it's not going to impact anyone. And in fact, the 1099s are not actually needed when filing your tax return. And we hope that you file early and on time in April so that we could have a good budget. But that has been extended until October. For anyone who needs assistance with the card or has any issues, you can call Money Network directly at 1-800-240-0223.

They are open Monday through Friday, 08:00 a.m. To 10:00 p.m. The Franchise Tax Board also has a website dedicated to the middle class tax rebate, and you can visit that at mctrpayments.com which is also a great resource. And finally, the Franchise Tax Board will be sending letters starting this month in March all the way to May. For those of you, for those individuals that have not yet activated their cards or maybe perhaps threw it away by accident, please call those numbers for more information.

Again, the number is 1-800-240-0223. With that, thank you very much. We're going to move on to our next issue. That is issue number three, student loan forgiveness income tax exemptions. Thank you to our panelists. You may begin.

Hi, I'm Robin Finnestead with the Department of Finance. Late last year, the Biden Harris Administration announced a plan to help working and middle class federal student loan borrowers, which initially included, among other things, up to $20,000 in federal debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in federal debt cancellation to non Pell Grant recipients. Borrowers are eligible for this relief if their individual income.

Would you mind speaking closer to the microphone, please?

Of course. Sorry. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for joint households. Currently under federal law, from tax years 2021 through 2025, all federal student loans that are forgiven are exempt from taxation. This proposal will partially conform to federal law and exempt from taxation any student loan discharged under the Biden Harris administration's federal student loan debt relief plan.

The policy rationale is that borrowers that have debt forgiven under the federal plan are not likely to have the resources to pay debt on this forgiveness. I'll also note that the Biden Harris plan is facing legal challenges, which was recently heard by the Supreme Court, and whether it will be upheld is uncertain. If upheld, this relief would help over 3.5 million Californians, including 2.3 million estimated Pell borrowers.

LAO, please.

Yeah, so just one comment on the potential revenue impact of this. There is a number highlighted in your agenda of hundreds of millions of dollars, and I think we would just comment that putting an estimate on that is there's a lot of uncertainties that go into that about a variety of taxpayer behaviors, and kind of the demographics of the folks who would be benefiting from this that make it difficult to really pin down that number.

But we do think that that number that's in your agenda is probably a reasonable sense of the magnitude that we could be talking about.

Thank you, Ms. Wicks.

Thank you. Just curious, does the Franchise Tax Board have a contingency plan for addressing borrower questions in the weeks after a Supreme Court decision? Assuming the Biden plan is allowed to be implemented.

Thank you Jeanne.

A couple of questions. Does the Administration have a more precise estimate of the amount of potential taxes that would be eliminated under the trailer Bill proposal, while recognizing that these revenues have never been implemented in the state budget estimates.

At this time we do not have a more detailed fiscal estimate. We do not have a detailed fiscal estimate for the revenue gain from potential taxation if this plan does not, if the forgiveness is not excluded, and we do not have an estimate for excluding that forgiven debt.

Okay, that's good to know. Is there a particular reason why the governor's trailer Bill Language, trailer Bill avoid the full conformity with the American Rescue Plans acts student loan debt relief tax provisions.

In addition to exempting loans forgiven under the Biden plan, full conformity with ARPA would exempt from income additional loans that were fully or partially discharged under ARPA in 2021 through 2025, such as private education loans, certain loans made by an educational organization which qualifies as a charitable organization, any loan provided for postsecondary educational expenses if the loan was made insured or guaranteed by a federal, state, local or governmental entity, or an eligible educational institution.

The narrower Governor's Budget proposal was chosen as our starting point for simplicity and clarity, as conforming to ARPA would create additional administrative burden. But the Administration is open to discussing this topic further with the Legislature.

Great. Thank you. If there are no additional comments or questions from the Committee, we will move on and we are holding this item. Thank you. We're going to move on to issue number four, enterprise data revenue project two. And we are on issue four out of 12.

All right, Good afternoon again. Jeanne Harriman, Franchise Tax Board. This is my seat today, apparently. So thank you. I'm here with Taylor Wong today, who's going to be presenting all of FTB BCPs. So issue four is the BCP supporting FTB's enterprise to data revenue project. Second phase, the start of fiscal year 2324 will see this project enter its third year. This year's proposal requests an augmentation of 135,000,000 and includes funding for 41 permanent positions, 31 limited term positions, and also includes vendor compensation of $116.5 million.

As the project continues, we will continue to build on the foundation set by the first phase of the project for centralizing technology solutions supporting key business functions. ADRT builds on this platform by expanding enterprise case management functionality and modeling services for audits, filing enforcements and collection workloads, as well as expanding customer service tools to allow taxpayers to self serve. Generally, that is on my FTB. Overall, the project is going well and the collaboration between FTB and our solution partners remains strong.

We are communicating and working well together and issues presents we are very thankful for the teamwork to resolve these issues. As a result, to date, the project is within scope, budget and schedule for the third year, project work will include efforts related to case management, modeling, website enhancements, enhanced data capture, training, data conversion, and then oversight functions such as independent verification and validation, also known as IVNV and quality assurance and independent security assessments.

Following the statewide process established to support funding for larger projects, an annual BCP is required for new costs related solely to that year, much like you just see displayed in the current BCP. However, FTB is also using a just in time approach to requesting resources across the years, and you can see this we are asking for resources for the same functions year over year. However, the BCP itself is only asking for resources for the current year.

For full transparency, FTB has noted these ongoing limited term and one time cost within the body of the BCP narrative, and we've also modified the workload measure document associated to the BCP to make it clear of the later year resources that are coming in that are like to the ones that we are asking for this year. One final note for transparency is to recognize the two provisional languages in our budget that support the EDRT project.

FTB's provisional language allows for the carryover of any appropriation associated with compensation that remains unused in any current fiscal year. Additional language supports the funding and use of a contingency Fund supporting the EDRT project that allows for a set level of funding not to exceed 5% of the total contract amount to cover costs associated with unplanned events and work efforts, but which are critical to the successful implementation of the EDRT project.

Thank you for your time and support and happy to answer any questions that you have.

Thank you. We'll go with the LAO, followed by the Department of Finance.

No comments.

Dirk Simmons, Department of Finance we have no additional comments.

Excellent, thank you. Any questions? Forum Committee seeing none, we are holding this item open. Thank you very much.

Thank you.

Issue five technology expansion for business entities refundable credit.

Thank you. Good afternoon. Taylor Long Franchise Tax Board issue five requests 4.5 million and 2, 2 year limited term and five permanent positions starting in fiscal year 23-24 to make necessary changes to our tax systems in order to support a refundable credit for business entities. This is a standalone proposal that prepares our systems to be able to make the refundable credit a more timely and feasible option, but it is not tied to any specific refundable credit.

Currently, FTB's business entity systems cannot refund any dollars that haven't already been paid in. The system constraint limits FTB's ability to implement legislative proposals, seeking to provide refundable tax credit to assist businesses in overcoming challenges. For example, last year FTB was approached about a potential refundable business credit for COVID sick leave. Due to the system complexities involved, FTB was not able to make changes within timeframes needed to provide timely relief.

Because FTB has noticed the desire over the last two legislative sessions to offer refundable business credits, FTB is putting forth this proposal now. The resources requested will enable FTB to make the extensive, complex and foundational system changes necessary to support refundable business credits in the future. The primary system that requires modification is written in cobalt, and FTB has limited resources with this skill set. In addition, FTB systems are highly integrated and complex to ensure a successful implementation and without risking or impacting FTB's tax return processing.

FTB is seeking vendor support for this change. Of the 4.5 million requested in this proposal, 3.4 million is for one time vendor costs. Again, the standalone proposal would allow FTB to implement the ability to implement refundable business credit starting in January of 2025. Due to the complexity of changes, FTB does need the 18 months to implement this functionality. If funding is deserved is deferred, then implementation time frames would shift accordingly. Please note, any specific credit that needs to be implemented will require additional technical and business resources.

Thank you for your time. Happy to take questions.

Thank you. We'll go with the LAO, followed by the Department of Finance.

So the question of whether or not the state should expand into having refundable business credits generally, I think there are both kind of pros and cons from a policy perspective in thinking about that question, but there are at least enough positives that it could be worth considering in some instances, and in fact, the Subcommitee will be considering that for a particular tax credit here in a couple of weeks.

But making these systems changes at FTB is kind of a prerequisite to even being able to have that conversation about the kind of policy pros and cons and so to the extent the Legislature views that as the conversation it wants to have, it probably should consider going ahead and making these technology changes to set the stage to be able to have those kinds of conversations.

Thank you. Department of Finance.

Dirk Simmons, Department of Finance we have no additional comments on this issue. Thank you.

Any comments or questions from the Committee? Seeing none, refundability is going to be the R word of this year that we're going to use a lot in sub four. Thank you. This item is being held open. We're going to move on to item number six, return processing technology support.

Thank you. Issue six is requesting 4.9 million and 29 positions starting in fiscal year 23-24 and ongoing to improve and maintain our existing machine critical applications and services that support FTB's return processing functions. As we've discussed, FTB's processes are underpinned by technology 87% of FTB's tax returns are fully processed without staff intervention, 83% of our personal income tax collections account are resolved through automated collections, and 80% of FTB's tax return payments are electronic.

Over the past several years, FTB's technology services division has consistently been asked to implement changes and adopt new workloads in support of FTB's return processing, either through legislative change or other internal change requests. At the same time, ongoing support and maintenance of FTB's systems and services have also increased in complexity due to enhanced fraud detection and validation needs, exponential growth in the amount of data acquired and consumed, and increased taxpayer demand for self services.

As a result, our technology services division is experiencing critical resource gaps that are impacting our return processing workloads. This augmentation will enable FTB to reduce the risk of adverse impacts to our return processing workloads, enhance our ability to react to change, and make return processing easier. Thank you.

Thank you, LAO.

We have no additional comments on the remaining FTB items on the agenda.

Great. Department of Finance.

Dirk Simmons, Department of Finance. We have no additional comments. Thank you.

Excellent. No comments or questions from Committee. We're going to leave this item open. We're going to go to issue number seven, excuse me, essential services and stakeholder support gaps.

All right, thank you. Item seven is a proposal requesting funding to ensure sufficient resources to do our work associated with support functions, including legislation, budget, procurement, research, project oversight, equal employment office services, and key HR workloads for maintaining employee talent.

This proposal requests 2.5 million and 13 positions ongoing to enable the Franchise Tax Board to engage in these critical support functions for internal services and external stakeholders. Within Franchise Tax Board, there are multiple areas that support these core services for all the Franchise Tax Board. Workloads in these business areas have continued to grow in both volume and complexity over the last five years.

As I'm sure you know, in many of the legislative areas, years where workloads increased and originally thought to be anomalies or one time events have now proven to be a normal year at the accelerated and escalated workloads. As a result, deficient staffing levels for these support functions prevent FTB from timely responding or adequately, to requests that we receive from our internal stakeholders as well as our external stakeholders.

Franchise Tax Board's inability to complete this critical work efforts produces jeopardy to the key policies of the Administration and the Legislature and impacts FTB's ability to complete essential work in the most effective manner. This augmentation ensures Franchise Tax Board's operations are strong and allows for optimal service levels for all critical external partners. Thank you for your time and support and I'm happy to answer any questions you may have.

Thank you. No comments from LAO. Comments from Department of Finance? None either. So no comments or questions at this time. We're going to hold this item open. Thank you. We're moving on to issue numbers.

Thank you so much.

Thank you. Issue number eight, tax expenditures report trailer Bill Language.

Good afternoon. Peter Abahazi from Department.

Can you speak closer to the mic please.

Yes. The tax expenditure report, the Department of Finance has been required to provide tax expenditure report since 1972 on a bi annual basis, and beginning in 1984, the frequency of the Department of Finance report was statutorily changed from once every two years to once per year.

So the report provides a comprehensive list and brief description of tax expenditures exceeding 5 million in annual cost and also includes fiscal estimates of the tax expenditure and various other data such as statutory, authority sensor date, number of taxpayers affected, and comparable federal benefits. Currently, the deadline for this report is September 15 each year, and this proposal changes the request to change the deadline from September 15 to November 1 and also requires finance to publish the report once every two years rather than annually.

The shifting of the deadline to November 1 is to better accommodate the timing of other budget related and legislative Bill analysis workload that is relatively heavy at this time of the year for finance and then the other part is to move to biennial report is to alleviate workload. More generally, changes to the revenue estimates and the majority of the content of the report do not change significantly year to year, so that argues for less frequent update of the report.

And also there's an overlap with other agency tax expenditure reports, for example, the Franchise Tax Board annually, although they not statutory required, but they annually release tax expenditure report covering the personal income tax and business tax, corporate income tax expenditures, and also the California tax and Fee Administration issues publication 61, which covers sales and use tax expenditures. Thank you.

Thank you very much, Mr. Ula. No additional comments. Mr. Abahazi, can you clarify whether the report, if potentially done every two years, will cover the same guidelines as it does annually?

Yes and as I mentioned, there is not a significant difference between, or substantial change between the reports. So, yes, it would be the same.

Okay, great. Thank you, Ms. Gomez Reyes.

Thank you, Madam Chair. My question is, how readily available is the information? Well, let me go back. The Committee staff comments had noted that the similar information from the tax expenditure report is available from the Franchise Tax Board on an annual basis. So my question is, how readily available is the information from the Franchise Tax Board and what are the specific challenges with providing the report that does exist?

Well, our report is basically based on the data, what we receive from the Franchise Tax Board. So there is an overlap between the two reports. And also, as I mentioned, the Franchise Tax Board is not statutorily required, but they are actually releasing this report every year.

So the information is there. How readily available, accessible is it?

It's published on their website.

It's published on their website. Thank you. Thank you, Madam Chair.

We're going to hold the item open. Thank you very much. We're going to move on to issue number nine, centralized revenue opportunity, system maintenance and operations.

Good afternoon, and I'll be mercifully brief. I'm Nick Maduros. I'm the Director of the California Department of Tax and Fee Administration. Thank you so much for having us here today. If I might just start with just a couple minutes of brief overview of the Department and our budget and sort of what we do for overview. And then for this specific request, I'll turn it over to the rest of the team. So CDTFA administers 39 different tax and fee programs for the State of California.

The largest of those is the Sales and Use Tax Program, which is actually three separate taxes, one of which goes to the state and two of which are large sources of revenue for cities and counties around California. Among those 39 are also our two newest programs, which you'll discuss today. The 988 Surcharge to fund mental health care in the State of California, and the Lithium Extraction Excise Tax, which is new this year.

Our budget is, in terms of our operations, is basically flat year over year. CDTFA, we pride ourselves on a continuous focus on operating fairly and efficiently. From fiscal year 21 to 20-21 to 21-22, we grew our year over year collections by 25%. Over three years, we've cut the cost of our operations per dollar of revenue by 22%, and we expect to see further cuts in that this year.

We're focused on how we can keep being more efficient, but also at the same time, how we can serve taxpayers better and make sure that we're doing the essential work that we need to do to ensure compliance on the part of taxpayers. So I just want to thank the team at CDTFA, which has done a spectacular job and is focused along with me every day on trying to do that job better for the people of California.

Thank you for that overview. Would you like to pass it on to... Ok, go ahead.

Sure. So let me turn it over to Jason Mallet, who's our CFO, to discuss the Centralized Revenue Opportunity System.

Thank you, Nick. And good afternoon, Chair Carrillo and esteemed Committee Members. My name is Jason Mallet, CFO of the CDTFA. So first up we have CROS. Let me give you a little background. So the Centralized Revenue Opportunity System, or CROS, is the Department's tax collection and distribution IT system. It encompasses all 39 of the tax programs that Nick had mentioned that generate over $90 billion per year. So our request is for maintenance and operations. We're requesting 8.9 million in fiscal year 23-24 and 24-25.

The 8.9 million is composed of three buckets. The first is maintenance and operations for 5.3 million, software license for 2.75 million, and operating expenditures, cloud and rent for some of the vendors staff of $850,000. The rationale for our request is that CROS is a proprietary system that requires ongoing maintenance and operations to onboard new legislation and also maintain and customize reporting for existing legislation. And with that, I'd be happy to answer any questions.

Thank you for that. We're going to go to the LAO office. So that's repeating myself, LAO office. And we go to the Legislative Analyst Office, followed by the Department of Finance.

Seth Kerstein, LAO. We don't have any concerns with the CROS proposal.

Thank you.

Dirk Simmons, Department of Finance. We have no additional information. Thank you.

Thank you. Thank you. I appreciate the savings that you have mentioned in your presentation as it relates to the General Fund and seeing some increases in that. So additional comments or questions? Seeing none, we're going to leave this item open. Thank you very much, gentlemen. We're going to move on to issue number 10, the California Healthcare Research and Prevention Tobacco Tax of 2016, otherwise known as Prop 56. Please begin.

Yes. Thank you. So as background, Prop 56 raised the cigarette and tobacco tax from 87 cents per pack to $2.87 per pack, which generated approximately a billion dollars in incremental revenues. Our revenues last year were just under $2 billion. So the CDTFA requests 2.5 million for fiscal year 23-24 and ongoing to continue 16 enforcement positions. The rationale for the request is that we originally had requested limited term funding because we didn't know how much workload was involved for 19 positions. Now that we know the workload, we're requesting ongoing funding for the 16 positions for enforcement. With that, I'd be happy to answer any questions.

We're going to hear from the LAO, followed by the Department of Finance.

Seth Kerstein, LAO. We have no concerns with the proposal.

Dirk Simmons, Department of Finance. We have no additional comments. Thank you.

Any comments or questions from Committee Members? No? Seeing none. We are going to hold this item open. Thank you very much. We're going to move on to our last issue of the day. That is, I'm sorry, two more issues. Oh, we have 12 issues. I'm sorry. Issue number 11, lithium extraction and geothermal development excise tax.

Yes. Thank you. So, as background, a large deposit of lithium, which is needed for lithiumion batteries, was discovered in the Salton Sea area.

Actually, I'm sorry. I'm going to pause for a moment and just go back to issue number 10.

Sure.

Was it last year? A year or so ago, the legislature passed a bill related to menthol, banning menthol in the State of California. Can you share what the potential tax revenue implication might be by not having that additional cigarette tax?

We'd have to run the data to see how much was menthol and then how much is. We expect to be transferred over to non-flavored cigarettes. But we could get you that information.

Okay.

Come up with an estimate.

Something to keep in mind. There's new pieces of legislation being introduced this year that relates towards the age of when someone can potentially buy cigarettes, which the goal is to potentially ban cigarette sales in total in California. Curious as to what the fiscal impact would be.

Madam Chair, if I may. Seth Kerstein with the LAO. We did analyze the fiscal effects of that referendum, and over the course of that analysis, in our view, there was quite a bit of uncertainty as to the revenue impacts. But that in our estimation, the annual tobacco tax revenue loss likely would be in the tens of millions to perhaps a bit higher than $100 million per year.

Is that just menthol or all flavored?

That was from all flavored tobacco.

Okay, excellent. Thank you. Good to know. Apologies for that. Do you want to add something too?

Yes, please, Chair Carrillo. Just to frame this a little bit. So, our revenues for cigarette and tobacco have declined over the last couple of years, in part, I think, due to this ban on flavored tobacco. Just to give you some guardrails. So our overall revenues were just under $2 billion. I believe last year they were about $1.8 billion.

As a general rule, cigarettes were about 90% of that, and other tobacco, vaping, and the like were the remaining 10%. You asked on the menthol portion, which is the larger bucket, so that's that 90%, and we can follow up with some specific information.

That would be great. Thank you. I think it's just an issue for us to prepare as to what that could potentially look like. Yes, sir.

Yeah. And just to sort of tie together my comments in terms of our estimate of the revenue loss, that amount is quite a bit smaller than what we understand to be the prior share of tobacco revenues that came from flavored tobacco. But based on some evidence we examined, we expected that a significant majority of tobacco use that had previously been of flavored tobacco would switch over to unflavored under the new policy.

Okay, thank you for that. Just a note for all of us, tobacco sales tax helps fund schools. It helps fund open space. It helps fund a variety of different things that we all care about. And so how do we find the difference? I think will be interesting, but thank you for that. Appreciate it. Okay, now we're going to move on to issue 11, lithium extraction and geothermal development excise tax.

Sure. Thank you. So, as background, a large deposit of lithium, which is critical for lithium-ion batteries, was discovered in the Salton Sea area. SB 125 supports the development of geothermal and lithium extraction facilities. It also imposes a volume based excise tax, which the CDTFA is responsible for collecting and administering. Our request is to implement the new lithium excise tax. CDTFA requests 249,000 in fiscal year 23-24 ratcheting down to $145,000 in 24-25 and ongoing.

Funding will be from the new Lithium Extraction Excise Tax Fund and will enable the Department to conduct outreach and education to the public and taxpayers, data collection and accounting, and website and system design. And with that, I'd be happy to answer any questions.

Thank you. LAO, followed by Department of Finance

Seth Kerstein, LAO. We don't have concerns with the proposal.

Dirk Simmons, Department of Finance. We have no additional comments. Thank you.

Thank you. No additional comments or questions from Committee? We are going to hold this item open and move on to our final issue, mental health crisis hotline, issue number 12.

Thank you, Chair Carrillo. So, as background, one in six Californians live with mental illness. AB 988 established a suicide and crisis lifeline a bit similar to the 911 telephone number. The program is funded by an eight cent surcharge per access line each month with expected revenues of over $55 million per year. Our request is, to implement the program, CDTFA requests 661,002 and a half positions in fiscal year 23-24 ratcheting down to $617,000 and two and a half positions in 24-25 and ongoing.

The funding is from the new 988 Mental and Behavioral Health Fund and will enable the Department to conduct outreach and register taxpayers, develop forms and return templates, data collection, and accounting, and with that, I'd be happy to answer any questions.

LAO followed by Department of Finance.

Seth Kerstein, LAO. We don't have any concerns with the proposal.

Dirk Simmons, Department of Finance. We have no additional comments. Thank you.

Thank you. Just one question for CDTFA. Can you explain the increase in resources requested from the appropriations analysis on this BCP?

Happy to, Chair Carrillo. So our initial estimate was for $495,000 and our final estimate here is for $660,000. The reason for the increase is, as we looked closer at the tax program, we noticed that this actually affects two other tax returns, one for the MTS program for prepaid phone cards, and another one for the 911 telephone number. So consequently, there are greater impacts for updating the tax returns as well as just general accounting and fund impacts.

Thank you. Any additional comments or questions from Committee? Seeing none, we're going to hold this item open as well. Thank you very much, gentlemen.

Thank you.

We are now accepting public comment at the end of this hearing, both in the hearing room and on the phone. The phone number to connect is on the committee website and should also be on your screen if you're watching this over the Internet. The phone number is 877-692-8957 the public access code is 131-5447 in the room. Make sure the microphones are on. Good afternoon. One moment.

Okay. Good afternoon, everyone. My name is Anna Hasselblad. I'm with United Ways of California and on behalf of the CalEITC coalition made up of advocates committed to ending poverty and really utilizing our tax system to get cash into households. We appreciate this hearing, and as you were covering some of the issues relevant to the Franchise Tax Board. We wanted to raise some of our priorities for this year.

You're going to consider a lot of critical issues, and we just want to highlight two that the CalEITC coalition are sponsoring, including expanding the CalEITC to a minimum of at least $300 for all filers. This would impact about 3 million Californians. They would see a greater tax credit. We're also proposing to expand the young child tax credit to all CalEITC eligible children, and that would impact about a million children in 700,000 households as well. So we are happy to work with you on these issues as it moves forward and be a service to this committee, and we thank you for your time. Thank you.

Hi, Kimberly Sanchez with Next Gen California and a part of the Campaign for California Borrowers Right Coalition here for issue three. We strongly support and thank our legislative and Budget Committee leaders for the legislator's proposal through AB 35, SB 220, to provide state tax relief on federal student debt cancellation through full conformity with the federal American Rescue Plan act, or ARPA. Exempting student debt relief from state taxation will allow California student borrowers to realize the full benefits of student debt cancellation. This is a crucial step in protecting California's most vulnerable borrowers.

This is an urgent issue as borrowers continue to struggle through the pandemic, recovery and high inflation rates. The full conformity to ARPA would capture several recent federal student loan relief and discharge programs under the Biden Administration beyond the 10 K 20K debt cancellation plan. And this is critical because if they are included as income, it could potentially push borrowers into higher tax brackets, further exasperating their financial insecurity.

I'll just mention the coalition letter submitted to the committee outlines a couple of proposals, and the coalition is requesting the legislature to consider to further strengthen SB 220, AB 35. For these reasons, we strongly support the legislator's proposal and SB 220, AB 35, and respectfully request that is adopted into the state budget along with consideration of the recommendations the coalition is requesting. Thank you.

Thank you. Seeing no additional individuals here in the hearing room, we're going to go to the phone line operator. You may begin.

Of course, our first line comes from line 19. Please go ahead.

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

With nearly 4 million student loan borrowers in California, the language in AB 35 conforms state law to ARPA, which exempts from federal taxation several of recent federal student loan relief programs under the Biden Administration. For these reasons, we strongly support the legislature's proposal in AB 35 and respectfully request that it be adopted into the state budget along with consideration of the recommendations the coalition is requesting. Thank you.

Line 29, you are open.

Hi, my name is Cody Hounanian. I am the Executive Director of the student Debt Crisis Center and I'm calling on behalf of issue three. The FCC is a nonprofit with hundreds of thousands of supporters in the State of California, and collectively we're part of the Coalition for Campaign for California Borrower Rights Coalition. I'm calling on behalf of item three.

Under the FTB items on the agenda, we strongly support AB 35, which provides state tax relief on federal student debt cancellation through full conformity with ARPA. Californians hold nearly 147,000,000,000 in student debt. The debt is a burden for families, it hampers the statewide economy, and it disproportionately impacts low income and students of color, particularly black and brown borrowers. Student debt cancellation would allow Californians financial freedom and give them the opportunity to participate fully in the economy. Exempting debt relief from state taxation will allow californian student loan borrowers to realize the full benefits of this type of policy. So we urge the legislature to adopt AB 35 into the state budget, and I request strong support. Thank you so much.

Thank you. Just a courtesy reminder that comments over the phone are limited to 1 minute. Next person, please.

Next one. Go to line 32, please. Go ahead.

Good afternoon. Nicole Wordelman on behalf of the Children's Partnership, thank you to the assembly for elevating the issue of the 988 crisis lifeline. Given the disproportionate impacts of the mental health crisis on black children and youth, including suicide and traumatic contact with the criminal legal system, we encourage the legislature to consider policies that decouple use of the lifeline from law enforcement agencies, especially for calls from schools for student mental health crises.

We also encourage the legislature to consider prioritizing any additional investments in the lifeline for hiring and training of racially and ethnically diverse peers to work the phone lines. Thank you.

Operator. If we can keep the calls moving, please. Let's move forward.

Of course. Next we'll go to line 25, please go ahead.

Good morning, chair and members. This is Zach Wooden, Vice President of legislative affairs, Student Center for California Community Colleges, representing 1.8 million community college students. Calling about issue three. While not all of our community college students need to take out federal student loans because of how affordable community colleges usually are in California, federal student loans are some of the most safest and affordable student loans to take out.

But due to the confluence of community college population being largely low income and students of color groups, which are disproportionately negatively impacted by the burden of student loan debt, conforming state laws in the American Rescue Plan act will lift up rather than push down thousands of community college students by removing the burden debt relief could have if counted towards their income.

So we, the student senate, strongly support the language of student loan debt forgiveness tax relief in AB 35 and SB 220 and hope to see this tax relief adopted into the final state budget. Thank you.

Next, we'll go to line 35. Please go ahead.

Hello, this is Kevan Insko with the Friends Committee on Legislation of California, part of the Cal EITC coalition. We'd like to ask the assembly for a $300 minimum for Cal EITC and to expand the YCTC to all Cal EITC eligible filers. My organization also strongly supports AB 35, SB 220 to exempt student debt cancellations. Thank you.

Next, we'll go to line 28. Please go ahead.

Hello, I am Christina Torres, representing John Burn, advocate for youth with the CalEITC coalition. I would like to ask the assembly to support a 300 minimum for all who claim the Cal EITC and to expand YCT to include all CalEITC eligible filers. These refundable credits are two of the state's most powerful tools to curb poverty and bring us closer. Thank you.

Next we'll go to line 36. Please go ahead.

Good afternoon. Anna Johnson with John Burton advocates for youth, echoing support for issue 3 and 12. And I manage our foster youth tax credit and vita site outreach for poverty reduction among California's foster youth and homeless youth. Those young people, according to our reports of last two years of filing, are working, but they receive such little from the CalEITC that tax filing really doesn't benefit them.

And next we will go to line number 38. Please go ahead. Your line is open.

But they're contributing to our economy and they deserve to be supported through the 300 minimum for all who claim the CalEITC and to expand the young child tax credit to all California low income families with a child. Thank you.

Next we'll go to 37. Please go ahead.

Hi there. This is Teri Olle calling from Economic Security Project Action and a member of the CalEITC Coalition calling to urge your support of a $300 minimum for the CalEITC and to expand the young child tax credit to include all CalEITC eligible dependents. These credits are really profound ways to cut poverty in California and build an economy that works for everyone. Thank you for your consideration.

Hello, Committee Members. Matt Einy here. I'm a student with UC Berkeley and a policy Director at GenerationUp, a student led advocacy organization advancing education equity, with members spreading across the State of California. And I'm calling again with regards to issue three. Conforming state tax law with federal debt relief program will help establish that no student deserves to be punished for receiving help with the cost of college, particularly as we've seen the cost of college become increasingly burdensome on college students and former college students.

And those costs in recent times have placed enormous pressure when we've seen higher cost situations like inflation and the pandemic in recent memory. As such, I urge you to support state tax relief on student loan forgiveness. Thank you very much.

Thank you. Next we will go to nine. Number 30, please. Go ahead. Your line is open.

Hi, good afternoon. My name is Edgar Ortiz, representing the California Immigrant Policy Center with the CalEITC coalition. We work to advance economic equity and inclusion for immigrants across the State of California. And I'm here today to respectfully ask the Assembly to support a $300 minimum for all who claim the California Earned Income Tax Credit and also to expand the young child tax credits to include all Caliitc eligible filers.

These refundable credits are two of the state's most powerful tools to curb poverty and bring us closer to a racially and economically equitable California. Thank you very much for your time.

Good afternoon, Chair and members. My name is Sada -, representing young invincibles with the Campaign for California Borrowers Rights and the CalEITC coalition. First, I'm calling in support of issue three. We strongly support 8035 and SB 220, which will provide full state.

Thank you. And we have about five in queue still. We will go to line number 34. Next, please. Go ahead. Line number 34, your line is open. Okay, next we will go to line number 39. 39, your line is open.

Which will provide state relief on federal student debt cancellation through full Committee, full conformity with ARPA. Under President Biden's student debt cancellation plan alone, a total of 3.5 million Californians could benefit from the debt relief. And we know that two thirds of those californian residents qualify for the 20,000 student debt cancellation the tax exemption will support California's most vulnerable student borrowers.

In addition, I would like to ask the assembly to support a $300 minimum for all who claim the CalEITC and to expand the young child tax credit to all CalEITC eligible filers. Thank you.

Thank you. Next we will go to line number 43. Your line is open.

Good afternoon, this is Rebecca Gonzalez with the National Association of Social Workers, California chapter calling to support everyone else who has talked about the CalEITC and the young child tax credit. Thank you very much. Thank you.

Next we will go to line number 42. Please go ahead.

Yes, good afternoon. My name is Alexis Barries, former foster youth and now advocate here to echo the need by asking the assembly to support a $300 minimum for those who claim the CalEITC and to expand the YCT to include all CalEITC eligible filers. Thank you for your time.

Thank you. Next we will go to line number 41. Please go ahead.

Hi, my name is -, representing JBay with the Cal EITC coalition. I would like to support the Cal EITC. Thank you.

Thank you. Next we will go to line number 34. Please go ahead. Your line is open. Line number 34, your line is open. Go ahead. Okay. And if there is any more public comments, it is one then zero. It's one, then zero. Okay, Madam Chair, we do not have anybody else in queue.

Thank you very much. Appreciate all the callers that called in today expressing your support. Again, if you would like to register your comment via email, you can do so at budgetsubfour@ASM.ca.gov. This concludes our first budgets of four Subcommitee for this season. Thank you. We are adjourned. Thank.