California Moves Toward Creating Business Tax Break Review Board

California’s largest income and sales tax breaks would get more scrutiny under a bill approved in the Senate Monday.

S.B. 956 by Sen. Hannah-Beth Jackson (D) would establish a California Tax Expenditure Review Board to examine the goals, beneficiaries, and costs of nine tax breaks that cost the state $8.2 billion a year and have no metrics to measure their effectiveness and no expiration date.

After the board issues a report in 2022, lawmakers could decide to alter or repeal the breaks if they decide they aren’t meeting the state’s goals, according to Jackson.

The bill moves to the Assembly after passing the Senate 25-13 and must pass the Assembly by Aug. 31 to reach Gov. Gavin Newsom’s (D) desk. He hasn’t taken a position on this year’s version of the bill.

The measure is similar to Jackson’s 2019 bill that Newsom vetoed because, he said at the time, it wasn’t necessary. But Jackson said the coronavirus pandemic makes it more urgent.

“As California considers deep and difficult cuts to our state budget to address the economic impacts of the coronavirus pandemic, we should have full knowledge of all of our options, including decades-old tax credits and incentives,” she said.

Nine tax breaks that cost more than $1 billion in revenue over 10 years would be up for review. Personal and corporate tax expenditures are:

• Water’s edge election that international companies can use to assign California income;
• Research and development credit;
• Like-kind exchanges for real estate;
• Tax treatment of subchapter S corporations; and
• Deduction for dividends paid to employee stock ownership plans.

Sales and use tax exemptions to be examined are:

• Animal life, feed, seeds, plants, fertilizer, drugs and medicines;
• Farm equipment machinery;
• Jet fuel for international flights; and
• Custom computer programs.

The board would be comprised of the state controller, legislative analyst, state auditor, director of the Department of Finance, and a member appointed by the Secretary of Government Operations with expertise in the state’s income and sales tax programs.

A coalition of business groups opposes the bill, arguing it would inject uncertainty into the state’s tax policy and wouldn’t account for the multiplier effects the tax breaks have in creating jobs or investment in the economy. Opponents include the California Taxpayers Association, California Chamber of Commerce, Qualcomm Technologies Inc., and shipping company AP Moller-Maersk.

“The threat of repeal of tax incentives, considering our state’s already high cost of doing business, poses a significant barrier to jobs, investment and the state’s long-term economy,” the groups said in a June 19 letter to senators.

Labor and education groups including the Service Employees International Union and California Federation of Teachers support the measure.