BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 2439 HEARING: 6/27/12 AUTHOR: Eng FISCAL: Yes VERSION: 6/20/12 TAX LEVY: No CONSULTANT: Miller & Grinnell CORPORATE TAXES: DISCLOSURE Requires the FTB to publish a list of the 1,500 largest corporate taxpayers and their tax liability. Background and Existing Law Existing state and federal laws generally prohibit unlawful disclosure or inspection of any income tax return information. Existing state law (RTC section 19546) allows a committee of either house of the Legislature to examine confidential taxpayer information. Criminal sanctions, including imprisonment, apply to FTB personnel convicted of unlawful disclosure or inspection of tax records. The Franchise Tax Board (FTB) must notify a taxpayer if criminal charges have been filed for willful unauthorized inspection or disclosure of their tax data. However, FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed. Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 500 tax delinquencies over $100,000 (AB 1418, Horton, 2006 and AB 1424, Perea, 2011). Existing state law provides various tax credits designed to provide incentives for taxpayers that incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits and Geographically Targeted Economic Development Area credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something but for the tax credit, they would otherwise not do. Except for four industries (agriculture, banking & finance, savings &loan and extractive) California law allows multistate taxpayers to choose which apportionment formula to use when paying taxes: the four factor formula based on personnel, property AB 2439 -- 6/20/12 -- Page 2 and double weighted sales or only on sales (single sales factor). Existing law also requires the Department of Finance to annually publish a report detailing tax expenditures, and relevant costs. A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a public company's performance. Although similarly named, the annual report on Form 10-K is distinct from the often glossy "annual report to shareholders," which a company must send to its shareholders when it holds an annual meeting to elect directors (though some companies combine the annual report and the 10-K into one document). The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information. Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded. In addition to the 10-K, which is filed annually, a company is also required to file quarterly reports on Form 10-Q. In the period between these filings, and in case of a significant event, such as a CEO departing or bankruptcy, a Form 8-K must be filed in order to provide up to date information. Proposed Law Assembly Bill 2439 requires the FTB to publish on its website a list of the 1,500 largest corporate taxpayers filing a Form 10-K with the SEC. Notwithstanding any other provision of law, including confidentiality requirements, the largest taxpayers shall be measured by gross receipts minus returns and allowances. The list shall include the name and tax liability of each taxpayer and whether the taxpayer made an election to apportion its income using AB 2439 -- 6/20/12 -- Page 3 only the sales factor (single sales factor). The bill requires that the determination for the list should be based on an original filed timely return and uses the same criteria to include a taxpayer that is part of a combined report (gross receipts minus allowances). The list published on or before December 1, 2013, shall reflect the tax liability as of October 1, 2013 for the 2010 and 2011 taxable years. Each subsequent annual list shall reflect the tax liability for the taxable year that closed two years before the publication of the list. For two years after the list is published, FTB shall update the list to reflect any changes of a taxpayer's tax liability. State Revenue Impact As the bill was substantially amended on June 20th, the revenue estimate from the FTB is pending. Comments 1. Purpose of the bill . According to the author's office: AB 2439 helps provide transparency and accountability in the corporation tax system. It asks for one simple data point which is very close to data which is already publicly reported in the SEC 10-K, for publicly-traded corporations. Reporting tax liability consistent with federal reporting will greatly advance the discussion of corporate tax reform and potential changes in the law, as it has at the federal level. Combined with other publicly-available data, this information will be very helpful in analyzing the impact of recent major changes in the corporation tax system. In order to have an informed discussion of on-going tax reform and to evaluate future proposed policies, it is important to know who pays and who has benefitted from the recent tax changes and what the impacts may be of changing the system during this difficult budget climate. 2. Opposition . The opposition expresses concerns that AB 2439 -- 6/20/12 -- Page 4 this bill will result in misleading information that provides no context for a taxpayer's disposition and will provide no objective evaluation of the single sales factor. For many multi-state corporations, their finality tax liability may not be resolved for years after their return is actually filed so the information in this bill may not be accurate. Furthermore, the opposition states that breeching taxpayer confidentiality is punitive to the individual taxpayer but will not provide further information to the state to determine whether specific tax policies made sense. 3. Trade Offs . AB 2439 poses a clear tradeoff in tax policy: are taxpayer privacy protections more important than making public information necessary to determine how much certain corporations pay in tax? While taxpayer privacy is the cornerstone of a self-assessed income tax system, how can the Legislature evaluate if the tax system is equitable when it doesn't know who pays what and what tax breaks are worth? Financial information is highly sensitive to both individuals and business - allowing friends and neighbors to know your financial investments or personal spending, or to disclose vital data in a tax return to a competitor, is a violation of privacy. For these reasons, state law allows felony prosecution for unlawful inspection and disclosure to enforce these safeguards, and FTB must notify any taxpayers if criminal charges are filed. Conversely, the proponents of the measure state that during this difficult budget climate, it is imperative to enact the bill to ensure that state policymakers have the information necessary to determine the impact of the elective single sales factor on the state budget. The Committee may wish to consider whether breaching the veil of taxpayer confidentially is worth the tradeoff for additional information. 4. Transparent tax credits . AB 2439 represents one method to compel additional information in the hopes of helping policymakers better evaluate the effects of tax policy changes on economic growth and job creation. However, the strategy may be ineffective for two reasons: first, tax credits recently enacted by the Legislature have been the model of transparency, and second, the information generated that questions its cost-effectiveness hasn't quelled proposals for more. SB 71 (Padilla, 2010) gave the California Alternative Energy and Advanced Transportation AB 2439 -- 6/20/12 -- Page 5 Financing Authority (CAEATFA) the authority to provide sales and use tax exemptions to green energy manufacturing, and is arguably the most transparent tax credit program in the state. CAEATFA updates its website at least quarterly with information on taxpayers that received the sales and use tax exemption, the amount of the exemption, the number of jobs created, and the proposed project's environmental and economic "net benefits." However, the largest exemption (over $40 million) to date went to the famously bankrupt Solyndra, and CAEATFA's own data shows that each job created by the program costs the state more than $120,000 in foregone revenue-likely more than the job itself pays. Legislators continue to propose to expand CAEATFA programs: SB 1128 (Padilla, 2012) seeks to apply the SB 71 program to include advanced manufacturing, and AB 796 (Blumenfield, 2012) seeks to expand its loan loss reserve program. The California Film Commission, which administers California's motion picture production credit, issues information about that credit, which the Legislature recently extended (AB 1069, Fuentes, 2011). The Committee may wish to consider if new information actually changes policy. If so, would it make more sense to make the information necessary at the beginning of any new tax credit, or compel mandatory performance measures and sunsets for all new tax expenditures as called for by SB 508 (Wolk, 2011)? 5. Public is public . The Securities and Exchange Act of 1934 requires companies with more than $10 million in assets whose securities are held by more than 500 owners to file annual and other periodic reports for the benefit of its shareholders and the investing public. These reports are available to the public through the SEC's EDGAR database. Shareholders and potential investors should have some idea of a firm's profits and losses, and assets and liabilities. The Citizens for Tax Justice (CTJ) combed through the financial reports of the nation's largest companies and found that 128 of the 250 largest U.S firms paid no federal corporate income tax in at least one year between 1981 and 1983 (17 paid no tax in all three). Based in part on CTJ's work, Congress enacted the Tax Reform Act of 1986, the largest tax policy reform in the history of the nation. The Legislature previously waived individual taxpayer confidentiality when it directed the tax agencies to AB 2439 -- 6/20/12 -- Page 6 disclose the top delinquents in the hopes that scarlet letters enforce compliance. AB 2439 goes much further: instead of the current reports that FTB compiles on the aggregate use of each credit, the measure directs state authorities to publish the names of the top 1,500 firms that file a form 10-K with the SEC, their total tax liability and their apportionment formula election. The proponents of this bill posit that more information and taxpayer names will result in more information and potentially substantive policy changes that produce a better return on investment from California's tax expenditure. FTB and the Department of Finance already publish tax expenditure reports detailing each tax preference and related information, including its costs. With that information, the Legislature has added more tax expenditures in recent years than it has limited or repealed. The opposition states that not only will the additional information not change public policy, but the information will lack context and not provide the final disposition of any individual taxpayer. The Committee may wish to consider whether substantive change will result disclosing previously confidential information, especially given the likely workload tradeoffs for FTB and the taxpayer privacy compromises necessary to obtain it. 6. Other states . No other state permits the disclosure of confidential taxpayer information. Four states allow some information but nothing as specific as this bill and nothing that specifically breeches taxpayer confidentiality. The Committee may wish to consider a combination of disclosure from existing state law. 1. Arkansas - Allows disclosure of the name of any taxpayer and the amount of any tax credit, tax rebate, tax discount, or commission for the collection of a tax received by such taxpayer from certain listed tax incentive provisions. 2. Massachusetts - Reports disclosing taxable income, tax, and selected other information are made available for inspection but the taxpayer names and locations must be redacted from the reports. 3. West Virginia - taxpayers' usage of tax credits, by ranges of amounts, are published and information about compromises of certain civil taxes are published. 4. Wisconsin - Requestors can obtain the amount of tax AB 2439 -- 6/20/12 -- Page 7 paid or payable for any taxpayer but must agree not to divulge, publish, or disseminate the information so obtained. Assembly Actions Assembly Revenue and Taxation: 5-2 Assembly Appropriations: 10-5 Assembly Floor: 47-24 Support and Opposition (6/21/12) Support : California Tax Reform Association (Sponsor); Alliance of Californians for Community Empowerment(Sponsor); Service Employees International Union, Local 721 (Sponsor); American Federation of State, County, and Municipal Employees; California Federation of Teachers; California Labor Federation; California Nurses Association; California Partnership; PICO California; Service Employees International Union, California. Opposition : BIOCOM; California Chamber of Commerce; California Aerospace Technology Association; California Bankers Association; California Grocers Association; California Healthcare Institute; California Manufacturers and Technology Association; California Retailers Association; California Taxpayers Association; California Water Association; Capital Area Transportation Authority; Council on State Taxation; Securities Industry and Financial Markets Association; Silicon Valley Leadership Group; TechAmerica; TechNet. .