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Bills seek to better regulate tax breaks

October 6, 2011 12:00:00 AM PDT
Two bills on Gov. Jerry Brown's desk seek greater accountability and transparency for corporate tax breaks. Under current law, California has no standard process for reviewing the efficacy of tax breaks and deciding whether to continue them.

Brown has until Sunday to sign or veto the massive stack of bills before him or they become law without his signature.

SB 364, by Sen. Leland Yee, D-San Francisco, would require a company that claims certain tax breaks and later cuts its workforce in California to pay a penalty.

SB 508, by Sen. Lois Wolk, D-Vacaville, would require tax credits to contain specific goals, data collection to measure whether the tax credit is meeting those goals and sunset on the credit after 10 years.

Both bills will apply only to new credits introduced after 2011.

Wolk said California's tax breaks total nearly $50 billion a year, equal to half of the state's total revenue, but are not evaluated with the same rigor as spending decisions.

A recent report by the Senate Office of Oversight and Outcomes warned that corporate tax breaks often swell far beyond initial cost estimates. In the 2010-11 fiscal year, the state lost $1.3 billion more than anticipated because of the tax breaks. "Unlike direct government spending, most tax expenditures are not capped or reviewed by lawmakers when they write budgets," according to the report.

In its latest report on California's tax breaks, the Department of Finance said it often lacks the necessary data to evaluate the effectiveness of tax breaks. For 70 of the 82 tax expenditures reviewed by the department, it concluded that the legislative intent was "not specified," according to a tally by the Senate Office of Oversight and Outcomes.

The California Chamber of Commerce has urged the governor to veto both bills. It called the penalties Yee's bill would impose on employers "the ultimate bait and switch."

"The policy rationale for imposing such a penalty is problematic because it punishes taxpayers whose overall employment is reduced year-over-year without any necessary connection between the failure of the business and the failure of the tax credit," according to a template letter the chamber is encouraging its constituents to send to Brown.

Chamber officials also oppose the sunset provision in Wolk's bill because they believe it will lead to more uncertainty in the tax code and will discourage investment in California.

The bill's supporters say the two-thirds vote required to reduce or repeal most tax breaks makes it nearly impossible to end a tax credit, even if it might not be effective. They argue that a sunset provision is necessary to ensure that the public's money is put to good use.

Similar versions of both bills were introduced last year, but Yee's died on the Senate floor, and Wolk's was vetoed by then-Gov. Arnold Schwarzenegger.

Annette Nellen, a professor at San Jose State University's College of Business, said she's pleased about the attention being paid to tax expenditures at the federal and state levels, but says the bills have some unfortunate limitations. She points out that they cover only income tax credits, when there are a lot of expenditures that come in the form of tax deductions and exemptions, such as the sales tax exemption for food.

Tax deductions, exemptions and exclusions should have the same level of scrutiny and accountability, she argued. She also expressed concerns that penalties for changes in employment might be misaligned and questioned why the automatic sunset isn't tied to a particular data measure.

"It's a toss-up between what's an effective way to keep your tax policy sound and the reality of how difficult it is to repeal any incentive," Nellen said. "That's why in the federal system, they just grow and grow."

Read more California investigative reports at CaliforniaWatch.com.

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