The Senate Revenue and Taxation Committee held a hearing February 24 to discuss "tax expenditure accountability," but did not take any votes or make any changes to existing tax incentives.
"We need to make sure that our expenditures, each and every one of them, make sense," Senator Wolk said. (The state officially refers to all tax credits, exemptions and other incentives as "tax expenditures.") The senator stressed that she will not let an incentive out of her committee unless it comes with a "sunset date" that will limit its effectiveness to a predetermined number of years.
Senator Wolk indicated that she may pursue legislation to further restrict tax incentives. "Stay tuned – we will be moving forward with legislation in this area," she said.
Cal-Tax Vice President and General Counsel Michele Pielsticker said that while it makes sense to try to measure the impact of tax incentives, just as the impact of government programs should be measured, the committee should be aware that some of the benefits of tax incentives are intangible. For example, she said the business confidence created by incentives is very important – and can cause employers to create or maintain jobs here – but simply cannot be measured.
Ms. Pielsticker also noted that jobs are not the only measuring stick for tax incentives. She noted that the net operating loss deduction is intended not just to help California's jobs climate, but also to create tax equity for cyclical businesses. External factors, such as widespread recessions, also make it impossible to isolate the effects of a particular incentive, she noted.
When considering the effects of tax incentives, the Legislature should note that confidence in the incentives "can make a difference for businesses on whether to locate or expand here," Ms. Pielsticker said.
Legislative Analyst Mac Taylor began the hearing by discussing the pros and cons of tax incentives. On the plus side: exemptions like the sales tax exemption for food and medicine are good policies that are very popular; using tax incentives to deliver assistance to a specific group is more efficient than setting up a costly government bureaucracy to collect and distribute aid; and tax incentives reach all taxpayers easily, and can be means-tested. On the negative side, he said there is not enough control to limit the dollar amount for most incentives; targeting is not precise, so some people get tax breaks without changing their behavior; and giving industry-specific incentives gets California into "a very unhealthy competition" with other states, with each trying to offer bigger tax breaks to lure companies.
Mr. Taylor was adamant that tax incentives or "tax expenditures" are not "loopholes." He said: "I want to stress that tax expenditures are not loopholes. … These are done intentionally – they're appropriate to do. You wouldn't call giving aid to someone – giving health benefits – a 'loophole.' A loophole is really something that's unintended, an ambiguous provision that someone kind of takes advantage of. These are not loopholes."
Cal-TaxReports, March 1, 2010
© 2010 California Taxpayers'
Association.
All Rights Reserved.