June 11, 2003
Dear Attorney General Lockyer:
Pursuant to Elections Code Section 9005, we have reviewed the constitutional and statutory initiative relating to corporation taxes and voting requirements regarding certain aspects of the corporation tax law (File No. SA2003RF0019).
Current Tax Law. California levies taxes on the income of both individuals and businesses through the personal income tax and corporation tax (CT). State law includes special tax provisions for certain business-related activities that result in lower tax liabilities than would otherwise occur. These special tax provisions include special tax rates, various deductions from income, and certain credits taken against taxes owed.
Current Voting Requirements. The State Constitution requires a vote of at least two-thirds of the members of each house of the Legislature for approval of measures—including special tax provisions—that result in increased revenues through the levying of new or changes to existing taxes. In contrast, legislative actions that result in reductions in revenues from such taxes require a simple majority vote of the Legislature.
The initiative defines corporate tax preferences (which we hereafter refer to as “special corporation tax provisions”) as certain tax laws adopted after January 1, 1985, including: (1) credits; (2) deductions that are not consistent with generally accepted accounting principles; (3) measures that result in special tax rates not available to corporation taxpayers generally; and (4) actions that extend special exemptions, exclusions, and elections to corporation taxpayers.
The initiative amends the Constitution and state statutes in the following manner with respect to such special corporation tax provisions:
Voting Requirements. The measure amends the Constitution to provide that the Legislature could repeal or amend special corporation tax provisions in a manner that resulted in increased revenue by the same vote as necessary for their approval. In other words, these tax provisions generally could be repealed with a majority vote rather than a two-thirds vote.
Reserve Requirement. The initiative directs that revenues resulting from the repeal or amendment of special corporation tax provisions adopted after January 1, 1985, be deposited into the state’s prudent reserve fund. These funds could only be appropriated during a state of emergency or in years in which current service levels of state expenditure programs exceeded revenues. (Current service levels would be based on program commitments as of June 30 of the previous fiscal year.)
Legislative Review Requirement. The measure establishes an annual legislative review requirement for all special corporation tax provisions as part of the budget process. This review would: (1) assess the cost of the provision; (2) determine its public purpose; and (3) evaluate the provision’s costs, benefits, and distributional impacts.
Sunset Provision. The measure establishes that any special corporation tax provision adopted (or expanded) after January 1, 2004 would be repealed after five years unless reenacted for one or more subsequent five-year periods.
The impact of the initiative would depend in part on definitions of special corporation tax provisions. To the extent that this term is broadly interpreted, the fiscal impacts would be larger than if a more restrictive interpretation of the term were to hold.
The measure would have the following fiscal effects on state government:
Voting Requirements and Reserve Fund. This measure, by decreasing the voting requirement for the elimination or limitation of special corporation tax provisions, would make it easier in some situations to raise state revenues from these sources. Thus, the measure could result in higher revenues from corporation taxes than would otherwise have occurred. The extent of any impact, however, would depend on a number of factors—such as the state’s financial circumstances, the composition of the Legislature, and its future actions. The CT generates in excess of $6 billion annually, and has numerous components that could be considered special corporation tax provisions under the terms of the initiative. The repeal or limitation of even a few selected provisions could result in significant revenue impacts.
The additional revenues received by the state from the elimination or limitation of special corporation tax provisions would be deposited in the state’s reserve fund. These additional revenues could then be used to: (1) fund current service levels (such as in low revenue-growth years), (2) increase the reserve level, and/or (3) provide for alternative tax reductions (such as broad-based tax relief).
Legislative Review. The annual review of each special corporation tax provision would result in some additional state administrative costs.
This measure would have the following major fiscal effects:
Potentially significant state revenue increases resulting from reducing the legislative vote requirement necessary to eliminate or limit certain special corporation tax provisions. Any increases could be used for spending increases, tax reductions, and/or increases in the state’s reserve fund. Fiscal impacts would depend on the composition and actions of future Legislatures.