February 22, 2005
Dear Attorney General Lockyer:
Pursuant to Elections Code Section 9005, we have reviewed
the constitutional and statutory initiative relating to corporation taxes (CTs)
and voting requirements regarding certain aspects of the CT law (File No.
SA2005RF0029).
Current
Tax Law. California levies
taxes on the income of both individuals and businesses through the personal
income tax and 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 those related to 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 CT 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 CT provisions:
Voting
Requirements. The measure
amends the Constitution to provide that the Legislature could repeal or amend
special CT 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generally could be repealed with a majority vote rather than a two-thirds vote.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 CT 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 CT 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 CT provision adopted (or expanded)
after January 1 of the year that the measure goes into effect 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 CT provisions. To the extent that this term is
broadly interpreted, the fiscal impacts would be larger.
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 CT provisions, would make it easier in some situations to raise state
revenues from these sources. Thus, the measure could result in higher revenues
from CTs 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 and the actions of future Legislatures. The CT generates about $9 billion
annually, and has numerous components that could be considered special CT
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 CT
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
funds for a state of emergency declared by the Governor.
Legislative
Review. The annual review of
each special CT 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 would go into a state reserve fund, where they
could only be used to fund current service levels or in response to a state
of emergency. Fiscal impacts would depend on the actions of future
Legislatures.