Tax study? I’ve got a commission for that!

Loren Kaye
President of the California Foundation for Commerce and Education

Too often the California Legislature behaves like Alexander the Great on the march. It passes bills and never looks back.

That the Legislature should study the effects of the legislation it passes should be obvious, and kudos when it chooses to actually take a look back.

But once the decision is made to study an issue, it is just as important to design an enquiry that will ensure a fair and nondisruptive outcome. A proposal currently under consideration is Exhibit A on how not to approach this.

SB 468 by Senator Hannah-Beth Jackson has come a long way from its original incarnation – aimed at repealing a number of popular, high-dollar tax exemptions and incentives, ranging from sales tax exemptions for food, medicine and utilities, to incentives for research and development and equipment purchases, amounting to more than $20 billion in tax increases.

Facing deep opposition from business and taxpayer organizations – CalChamber had labeled the bill a Job Killer – the Senator amended the bill to instead “comprehensively assess major tax expenditures.” The bill then passed the Senate and is awaiting a hearing in the Assembly.

But here is where the design of the study is nearly as threatening as the original bill.

Instead of merely tasking an expert public or nonprofit agency to conduct the study, the bill creates a “California Tax Expenditure Review Board” to do the job. Comprising five state officials or department heads, the Review Board would be permanently established with the sole mission of continuously reviewing one or another major tax expenditure.

Studying the effects of legislation is one thing. Creating a new, ongoing state agency is asking for trouble.

A commission that revisits the same tax issues would create uncertainty among employers and investors who must determine the impacts on their businesses and investments from possibly losing these tax incentives, which in turn would undermine California’s economic growth. A permanent commission would take on a life of its own, pursuing other agendas to justify its existence.

A better approach would be to simplify and focus: jettison the new agency and instead direct the Legislative Analyst to conduct a comprehensive, one-time study on the effectiveness, costs-benefit, and economic impacts of these major tax expenditures.

The stakes are not trivial. California levies high taxes, so the few incentives to encourage particular activities can be very important. A case-in-point is the research and development tax credit.

In 2015, the Milken Institute released “California’s Innovation-Based Economy,” which summarized the importance of the R&D tax credit to California’s economy. “While California can’t directly affect innovation policies at the national level, it can reduce the cost of capital and make itself more attractive through the use of aggressive state R&D tax credits or by funding research at its universities,” the report stated. “Extensive empirical research over the past two decades demonstrates a strong relationship between R&D tax credits and R&D activities.”

Researchers modeled economic activity from the credit, finding that “$700 million in additional research credits would stimulate approximately $4.5 billion to $6.8 billion in additional research and development activity in California, a multiplier of between 6.4 and 9.7.”

The Legislature should analyze the impacts of legislation to be accountable to businesses, institutions and voters. The end goal, however, should be creating a fair assessment, not a permanent commission.

 

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