Today (February 22), the California Assembly Committee on Revenue & Taxation and the Committee on Accountability and Administrative Review held a joint hearing on Assessing Tax Expenditure Programs in Light of California's Fiscal Challenges. I gladly accepted an invitation to testify. I think this is a very important area that needs more attention because tax expenditures are growing in number and cost, continue to be overlooked in budget decisions (including when looking for spending cuts) and they violate a few principles of good tax policy. That said though, there can be value in tax expenditures if carefully designed to best meet the state's goals and it has been determined that alternative means of meeting the goal are not as good as using the tax system.
I was on this panel - How Do We Assess Tax Expenditures and Ensure Their Effectiveness, along with Jason Sisney with the Legislative Analyst's Office and Darien Shanske of UC Hastings College of Law.
I'll post my written testimony soon, but wanted to post part of it now in hopes of getting comments from readers. One of my suggestions to improve effectiveness was to go through the following six sets of questions.
Improving Effectiveness of Tax Expenditures
The following questions can help improve the effectiveness of proposed tax expenditures. To illustrate each question set, it is applied to a made-up proposal to provide a credit to students who prepare to teach STEM topics (science, technology, engineering and math).
- Jurisdiction's Goals and Strategy: Have the jurisdiction's economic, societal and environmental goals been identified and articulated? To help determine if the purpose of a tax expenditure is appropriate, it must be judged by how well it helps the jurisdiction meet its goals. Thus, such goals need to be articulated. In addition, answers should be provided as to why the tax expenditure is the necessary and desired way to help achieve the goal and why alternative uses of the funds would not be better.
Example: What is the California goal that will be advanced by the tax credit? How will the credit help the state meet the goal; that is, what is the connection between the program and the goal?
- Tax System Relevance: (A) Does the tax system hinder the jurisdiction's achievement of the goal such that modification (the addition of special rule) is needed to help the jurisdiction meet its goals? OR (B) Would the tax system be an effective and appropriate vehicle for delivering the benefit? What are the pros and cons of using the tax system to provide the incentive compared to alternative means (such as a grant)?
Example: It is unlikely that there is any tax system feature that hinders students preparing for STEM topics. Thus the question is whether the tax system is an effective and appropriate vehicle for delivering the benefit. Arguably, it is not because the FTB would have to gather information on the student's courses and major. Also, unless refundable, the credit would only be obtained if the student had a tax liability. In addition, the credit would not be delivered when needed, that is, when tuition is due. A grant program could better deliver the benefit, assuming the benefit is needed to help the state meet its goals.
- Tax Policy Considerations: Principles of tax policy, including equity, simplicity, neutrality and efficiency, minimum tax gap and transparency should be considered in the design of the tax expenditure.
Example: Measures would be needed to be sure the student is actually preparing to become a STEM teacher. Issues would need to be addressed as to whether the credit should be refundable and whether a student claimed as a dependent should be eligible.
- Budget Considerations: What is the estimated direct and indirect costs of the special tax rule? How long should the tax rule be in effect? How will the cost be controlled (such as setting an aggregate limit for a tax credit)? Will the method of paying for the special rule hinder the ability of the special rule to meet its purpose or cause a greater detriment to the jurisdiction than would occur in absence of the special rule? Could greater benefits be derived for the jurisdiction through other uses of the funds (even if for a different purpose)?
Example: Legislators need an answer to the question – Why is this credit a good use of state resources? Data would need to be analyzed to determine how much the credit should be to serve as an incentive and an aggregate cap determined and implemented. Consideration should also be given to how the credit affects existing grant programs for higher education to be sure there is no duplication. In addition, consideration is needed as to whether more resources will need to be directed to STEM instruction to ensure that the expected increase in number of STEM students can be served. Alternative uses of the funds should be evaluated to construct the best program to help the state meet its goal of increasing the number of STEM teachers.
- Accountability Measures: What accountability measures should be included to ensure that the special tax rule is properly used? (See examples of commonly used accountability measures in the next section.)
Example: Consideration should be given to including a clawback measure should a student not become a STEM teacher. A sunset date should be added to ensure that the credit will be evaluated for effectiveness.
- Assessment: What data is needed to determine if the special tax rule achieves its purpose? How and when will the data be collected? Should the enacting legislation also specify data collection requirements? Who will monitor collection and who will analyze the data?
Example: The enacting legislation should specify the data that is needed for evaluation purposes and who will collect it and how. The enacting legislation should also specify a measurable and appropriate goal, such as a percentage increase in the number of STEM teachers who utilized the credit.
What do you think?
