SB 508 vetoed - the future of accountability measures

I've discussed accountability in prior posts (such as 10/8/11 and 5/22/11 and 1/3/10) and there has been recent legislative activity in California, such as SB 364 and SB 508 both reaching Governor Brown's desk this month for signature (see 2011 posts above for information on these bills). This weekend, Governor Brown vetoed both bills as being too broad.

See Governor's veto messages for:

SB 364 (10/8/11)
SB 508 (10/9/11)

In vetoing SB 508, Governor Brown says he agrees with sunset provisions for personal and corporate tax credits, he thinks all bills should be examined to determine how long they exist rather than using a one size fits all approach.

I wish he had said more to help the legislature pass an accountability bill that he will not veto.

I wish he had said:

1. Do not be so narrow to only focus on special tax rules that come in the form of tax credits, also consider special deductions, exclusions, exemptions and rates.

2. Establish a framework that must be considered in all bills that create special rule to ensure that an appropriately tailored accountability system exists for the provision. Such a framework would get around the one-size-fits-all problem, yet would ensure that bills creating or modifying a special tax rule would have an accountability measure included with it.

In June 2009, I had an article, "Calls for Accountability: Will It Help the Overall Incentives Process?" in RIA's Journal of Multistate Taxation and Incentives. Here is an excerpt with an analogy to how businesses employ accountability measures. For the same reasons that businesses employ accountability measures to ensure they are spending their money wisely, government should do the same. The excerpt also includes an example of problems that can arise when goals and accountability measures are not included in tax incentives legislation.

"The Necessity of Accountability

While accountability often conjures up thoughts of someone looking over our shoulder or seeking reasons to deny a benefit, accountability is an important aspect in any decision for directing funds to a particular use.

Executive compensation analogy: Accountability in the incentives arena is analogous to what a business might do in designing a compensation package for an executive. Business X might use a signing bonus to entice an executive to leave his or her current job and take a new one at X. Arguably this upfront payment is risky because the executive might not work out. Yet, it is deemed reasonable due to the significance of the change X asked of the executive and the risk the executive assumed. Other incentives are likely to be performance-based, such as stock options and bonuses tied to meeting specific goals.

The executive’s compensation package is likely to include annual performance reviews, repayment of incentives for misrepresentations, and some protections for not meeting targets if due to reasons beyond the executive’s control, such as a natural disaster or an economic downturn. In designing the compensation package, X’s advisers will consider the short- and long-term goals for X and the need for accountability to shareholders.

Problems from inadequate accountability: Perhaps as frequently as the newspapers report companies leaving or moving to a state due to a package of incentives, there are reports of governments wasting funds on incentives that appear to have provided no benefit to the jurisdiction.

Lack of accountability can jeopardize incentives because with no data on use and effectiveness, the incentives are vulnerable to repeal due to the ease of arguing that their cost exceeds the benefits produced. In addition, it is important that the purpose and goals of an incentive be adequately stated up front so that accountability can occur. Otherwise, an incentive might be called into question because its supporters tout how wonderful it has been while its questioners tout that it has not lived up to its promise. For example, in California, some businesses state that enterprise zone incentives have worked effectively to stimulate the economy.[1] In contrast, the California Legislative Analyst’s Office has recommended that the enterprise zone incentives be phased out because they have not been shown to be cost effective in generating new economic activity in the state.[2] This extreme dichotomy of views likely indicates lack of sufficient data and specificity of goals to allow for effective accountability rather than an ineffective incentive.

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[1] For example, see California Chamber of Commerce, “California Enterprise Zone Program Positive, Effective State Policy,” 5/1/08; available at the organization’s website at www.calchamber.com/Headlines/Pages/CaliforniaEnterpriseZoneProgram.aspx.

[2] California Legislative Analyst’s Office, “The 2008-09 Budget: Perspectives and Issues,” page 116, available at the LAO website at www.lao.ca.gov/analysis_2008/2008_pandi/pandi_08.pdf.

What do you think?