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Sunday, May 22, 2011

California SB 508 and Accountability

I am surprised and pleased about the attention being paid to tax expenditures at the federal and state levels. In California, SB 508 passed in the Senate on April 25, 2011 and was referred to the Assembly Revenue & Taxation Committee on May 9. This bill attempts to bring more accountability to tax expenditures going forward (starting in tax years after 2011). This bill would:

"authorize a personal income or corporation tax credit to contain, among other provisions, (1) specified goals, purposes, and objectives that the tax credit will achieve, (2) detailed performance indicators to measure whether the tax credit is meeting those goals, purposes, and objectives, and (3) a requirement that the tax credit cease to be operative 7 taxable years after its effective date, as specified."

I think this might also have the effect of sometimes causing the credit not to be enacted in the first place. That is, in writing up the purpose of the credit and how they can be measured, I think there would be better discussion as to whether such goals are appropriate and whether alternatives including direct funding would be better.

Some unfortunate limitations with the current bill:

  • Why does it only address credits in the personal and corporate income tax? Tax expenditures also come in the form of deductions and exclusions.
  • Why only income tax expenditures? Tax expenditures can also exist in any type of tax. They exist anytime there is a special rule that is not crucial to defining the tax base and tax calculation. For example, the sales tax exemption for food is a tax expenditure.
  • Why the 7-year sunset that appears to be unconnected to the assessment results? Why not just provide that the legislature must annually review the assessment data (or perhaps every two years) and if the goals are not being met, the credit expires the next year? The Senate floor analysis (4/13/11) notes this opposition: "Some opponents to this bill state that mandatory sunsets for tax expenditures are inappropriate and unfair when similar requirements do not apply to spending programs. Others state that the seven year standard is arbitrary; while sunset provisions and performance review are important, a firm's investment horizon and the tax credits themselves vary from case to case, and the same, fixed sunset period should not apply to tax incentives which may require different periods of time to accomplish its purposes." I agree with this except that direct budget items arguably do get scrutinized in each annual budget cycle. The legislators should be trusted to be able to evaluate the credit assessment data and act accordingly. Public oversight of this, particularly by the press and public interest groups will make it difficult for the legislators to continue a credit when the assessment data says the credit is not meeting its stated goals.

The Senate Committee analysis (3/24/11) has a good discussion of perceptions on tax expenditures including whether the attention is wrong because it ignores the view that taxpayer money belongs to them. I don't agree with that perspective. For example, when Jane claims a mortgage interest deduction on her second home, other taxpayers pay for that benefit. That is, instead of the mortgage interest deduction on a second home that benefits a few people but results in reduced tax collections for the government, there could instead be lower rates for everyone or a higher standard deduction for everyone.

The analysis also includes an entertaining example which I noted in a 3/29/11 blog post - here.What do you think?

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