BILL ANALYSIS
AB 2303
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Date of Hearing: April 19, 2004
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Rudy Bermudez, Chair
AB 2303 (Leno) - As Amended: April 16, 2004
2/3 vote. Fiscal Committee.
SUBJECT : Franchise Tax: Executive Compensation Deduction
SUMMARY : Provides that no deduction may be claimed by a public
utility for any bonus paid to an executive officer during the
period that the utility is insolvent, and requires that any
expense resulting from a bonus paid to an executive officer of
an insolvent utility be borne by the shareholders of that
utility rather than being recovered through rates.
Specifically, this bill :
1)Provides that any expense resulting from a bonus paid to an
executive officer of an insolvent utility shall be borne by
the shareholders of the utility, and that no expense resulting
from the payment of a bonus by an insolvent utility may be
recovered in rates. For purposes of this bill, insolvent
means that the utility has ceased to pay its debts in the
ordinary course of business, the utility cannot pay its debts
as they become due, or the utility's liabilities exceed the
utility's assets.
2)States that notwithstanding any other provision of the tax
code, no deduction shall be allowed for the costs paid or
incurred during the taxable year by a public utility for any
bonus paid to an executive officer during the period that the
utility is insolvent.
3)Defines an executive officer as any person who performs
policymaking functions and is employed by the utility, and
includes the president, secretary, treasurer, and any vice
president in charge of a principal business unit, division, or
function of the utility.
4)Provides that this bill's provisions do not apply to any bonus
that is part of a standard employee compensation contract.
EXISTING LAW generally allows businesses to deduct their
AB 2303
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ordinary and necessary business expenses. Ordinary and
necessary business expenses generally include wages and
compensation paid to employees. However, both California and
the federal government deny businesses a deduction for
compensation in excess of $1 million per year that is paid by a
publicly held corporation to the corporation's chief executive
officer or any of the corporation's other four highest paid
officers.
FISCAL EFFECT : An estimate from the Franchise Tax Board (FTB)
is pending. By denying a corporate tax deduction, this bill has
the potential to raise state revenue by an unknown amount.
COMMENTS :
1)This bill was heard and passed by the Utilities and Commerce
Committee on April 12, 2004 by a vote of 7-4. Because the
Utilities and Commerce Committee has already analyzed the
provisions of this bill that fall within that committee's
jurisdiction, this analysis will focus on the tax-related
provision of the bill.
2)Background : This bill arose from a December 31, 2003
announcement by Pacific Gas & Electric (PG&E) that it would
pay over $85 million in stock retention bonuses to 17 current
and former senior executives while the company was still
officially under Chapter 11 bankruptcy protection. These
retention bonuses were part of a program established in
January 2001, shortly before the company filed for bankruptcy
at the height of the energy crisis. PG&E claims that the
bonuses will be funded by reducing shareholder dividends. The
California Public Utilities Commission (CPUC) is currently
conducting an investigation to determine to what extent, if
any, these bonuses will be paid through rates. Under
CPUC-established rules, all investor-owned utilities,
including PG&E, may recover all reasonable operating costs
through rates. Operating costs generally include salaries and
bonuses if the CPUC finds that such expenses are reasonable.
3)According to information provided by the author's office, PG&E
is not alone among companies who requested significant
retention bonuses for their executives while in bankruptcy
proceedings. Enron, WorldCom, United Airlines, and Conseco
have also done so within the past few years.
AB 2303
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4)Suggested Amendments :
a) As currently written, this bill denies a deduction for
the costs paid or incurred by a public utility for any
bonus paid to an executive officer during the period in
which the utility is insolvent. Because FTB would have no
way of knowing when, nor for how long a public utility
meets this bill's definition of "insolvent", this bill
requires an amendment intended to provide FTB with that
information.
b) This Committee may also wish to ask this bill's author
to accept an amendment denying a deduction for a bonus paid
during any taxable year in which a public utility is
insolvent; use of the word "period" is unclear and could
lead to disputes between taxpayers and FTB.
c) Finally, this bill states that its provisions do not
apply to any bonus that is part of a standard employee
compensation contract. An amendment to clarify what is
meant by the term "standard employee compensation contract"
would also help clarify this bill's application and reduce
the possibility of disputes between taxpayers and FTB.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Eileen Roush / REV. & TAX. / (916)
319-2098