BILL ANALYSIS Ó AB 1561 Page A Date of Hearing: April 4, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 1561 (Cristina Garcia) - As Amended March 28, 2016 Majority vote. Tax levy. Fiscal committee. SUBJECT: Sales and use taxes: exemption: sanitary napkins: tampons SUMMARY: Establishes a sales and use tax (SUT) exemption for sanitary napkins and tampons. Specifically, this bill: 1)Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption. 2)Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after this bill's effective date. EXISTING LAW: AB 1561 Page B 1)Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state. 2)Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE). FISCAL EFFECT: The BOE estimates that this bill would reduce state and local revenues by $20 million annually. COMMENTS: 1)The author has provided the following statement in support of this bill: AB 1561 is a bipartisan effort to make menstrual products exempt from the sales and use tax at both the state and local level. California women pay over 20 million dollars annually for taxing tampons and sanitary napkins, which are essential health items for women. As a state we should not be taxing women for being born women. The tax is especially unjust for women who are low-income or homeless who struggle to pay for these basic necessities each month for the majority of their adult life. Menstrual products need to be more accessible and eliminating the tax on tampons and sanitary napkins is an important first step in making them more affordable. California's tax code exempts AB 1561 Page C health items like walkers, medical identification tags, and prescription medication, including Viagra. Tampons and sanitary napkins are not exempt even though women do not have the choice to ignore their periods and are far from being luxuries items. When these items are labelled as "feminine hygiene" products, it makes people forget that the FDA regulates both products as medical devices. These is no equivalent health product that is used only by one gender on a monthly basis for 40 years of life. Across the world, countries as well as select states in the US are organizing to repeal the sales tax on feminine hygiene products. California should continue to be a leader by addressing the gender inequality in our tax code and exempt menstrual products. 2)Supporters of this bill note the following: Women on average spend $1,400 dollars more a year for the price of goods than males. While paying more for the price of goods, women make 79 cents on the dollar when compared to men. Women pay at least 20 million dollars annually in sales and use taxes on feminine hygiene products to the State of California. To date, feminine hygiene products in 5 states (Maryland, Massachusetts, Minnesota, Pennsylvania and New Jersey) are exempted from sales and use taxes. Feminine hygiene products are a basic necessity for women; therefore, these products should be considered a "necessity of life" under California law and should be exempt from state sales and use taxes. AB 1561 will end a long standing tax on women. 3)This bill is opposed by the California State Association of Counties, which notes: AB 1561 Page D After the past thirty years of changes to sales and use tax allocations, counties now receive almost half of sales and use tax revenues. About two-thirds of that revenue is constitutionally dedicated to providing local public safety services and federal and state programs, including social services, incarceration, and rehabilitation. The State Board of Equalization estimates an annual loss of revenue [of] $20 million annually will result if AB 1561 is enacted. We respectfully request that the proposed sales and use taxes exemption is limited to only the state share so that vital dollars continue to flow to critical service needs. We have no concern with the state's share being exempt to promote the goals of AB 1561 as statewide policy. 4)The BOE notes the following in its staff analysis of this bill: a) Terms should be defined : "The difficulty with both administering and complying with new exemptions is determining the sales that qualify for the exemption under the statutory language. This bill provides no definitions for the products proposed to be exempted. Women use other products for menstrual hygiene purposes that may not fall within the commonly understood term, 'sanitary napkin' or 'tampon,' such as cloth menstrual pads and feminine protection cups. As the bill progresses, staff will work with the author to clearly define these terms consistent with the author's intent." b) Certain care providers and hospitals would additionally benefit from the proposed exemption : "Since sales of these products to these service enterprises are currently subject AB 1561 Page E to tax, this bill would provide an additional benefit to these entities that purchase these products for their clients or patients." 5)Committee Staff Comments a) What is a "tax expenditure" ? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). b) How is a tax expenditure different from a direct expenditure ? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote. AB 1561 Page F c) An overview of the SUT Law : California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE. The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In fiscal year (FY) 2014-15, SUT revenues were estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51. d) What accounts for the state's reduced reliance on SUT revenues ? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts AB 1561 Page G and economists from across the political spectrum argue that California should expand its SUT base. It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy. e) What would this bill do ? This bill would provide a complete SUT exemption for both sanitary napkins and tampons. In addition, the author has expressed her intent to extend this exemption to both menstrual cups and menstrual sponges. f) An inherently regressive tax : The SUT has been widely criticized as a regressive exaction that most heavily impacts those least able to pay. For example, a survey by the Nevada Legislative Counsel Bureau long ago concluded that in the case of a retail sales tax with food exempt, "the lowest income group would experience the highest ratio of tax to income . . . ." (Survey of Sales Taxes Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others, however, contend that a degree of progressivity is provided via the various exemptions built into most state SUT laws (i.e., for certain necessities of life such as food, housing, and medical care). Proponents of this bill might argue that an exemption for sanitary napkins and tampons would further promote a degree of progressivity in an already regressive tax regime. AB 1561 Page H Proponents might also note that, to reduce the regressive nature of the SUT tax, exemptions have been enacted for numerous necessities of life, including food and prescription medications. Critics, however, might contend that SUT exemptions are a blunt instrument for affecting social policy. While this bill would provide financial relief to low-income women struggling to make ends meet, it would also provide relief indiscriminately to wealthy consumers who might not even notice the exemption.<1> g) Taking a different tact : A recent editorial in the New York Times noted that even without being taxed, tampons and pads are unaffordable for some individuals. As a result, the editorial noted that policymakers around the country are offering different proposals for ensuring that women have access to these products. Specifically, New York City Councilmember Julissa Ferreras-Copeland is working on legislation to require all public schools in the city to provide free tampons and pads in restrooms. Moreover, in Congress, Representative Grace Meng of New York introduced legislation allowing individuals to pay for feminine hygiene products with their health care spending accounts. ("End the Tampon Tax." Editorial. New York Times 8 Feb. 2016, page A24.) h) Absence of a sunset date : In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of an appropriate sunset provision. -------------------------- <1> The author's office notes that women in California pay roughly $7 per month on sanitary napkins and tampons. Applying the statewide average SUT rate of 8.335%, purchasers are paying roughly $0.58 per month in SUT on these products. AB 1561 Page I REGISTERED SUPPORT / OPPOSITION: Support ACT for Women and Girls American Academy of Pediatrics, California Asian Pacific Islander American Public Affairs Association Bayer Black Women for Wellness California Asian Pacific Chamber of Commerce California Grocers Association California Latinas for Reproductive Justice AB 1561 Page J California Primary Care Association California Retailers Association California Women's Law Center City of West Hollywood Community Action Fund of Planned Parenthood of Orange and San Bernardino Counties Conscious Period Equal Rights Advocates Forward Together NARA Pro-Choice California National Association of Social Workers, California Chapter National Center for Youth Law National Council of Jewish Women Physicians for Reproductive Health AB 1561 Page K Planned Parenthood Action Fund of the Pacific Southwest Planned Parenthood Action Fund of Santa Barbara, Ventura, & San Luis Obispo Counties Planned Parenthood Advocates Pasadena and San Gabriel Valley Planned Parenthood Affiliates of California Planned Parenthood of Mar Monte Planned Parenthood Northern California Action Fund State Board of Equalization State Board of Equalization Member Fiona Ma Target URGE: Unite for Reproductive & Gender Equity Walmart Opposition AB 1561 Page L California State Association of Counties Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098