Selection of Corporate Income Tax Expenditures We Reviewed
To determine which corporate income tax expenditures (tax expenditures) to review, we analyzed the three most recent tax expenditure reports by the Department of Finance (Finance) to locate the six largest state‑only tax expenditures by total forgone revenue. As shown in the Table, we sorted each tax expenditure into one of three categories: whether it is exclusive to California with no comparable federal tax expenditure, whether a comparable federal tax expenditure exists but the State’s version includes substantive differences, and whether the tax expenditure directly conforms with a federal credit. We also reviewed each tax expenditure to determine whether it was appropriate for review based on the year it went into effect, whether it is still in effect, and whether the Franchise Tax Board had data on corporations claiming it.
The table shows that many tax expenditures presented in Finance’s reports were not good candidates for review because they were no longer in effect, they conform to federal law and thus are not state‑only corporate income tax expenditures, or they were enacted so recently that sufficient data do not exist. We did not consider tax expenditures that are no longer in effect because doing so would offer little value to the Legislature. We also did not consider those that conform with federal law because the scope of our audit was limited to state‑only corporate income tax expenditures. We selected only tax expenditures with at least three years of available tax data so we could properly value them against other tax expenditures. Because the most recent complete corporate tax data available were for the 2010–11 through 2012–13 fiscal years, we used those years when making our selection.
|Forgone Revenue (in millions)|
|Expenditure||Fiscal Year 2010–11||Fiscal Year 2011–12||Fiscal Year 2012–13||Total||Conformity with federal law*||Selected for review?||Reason tax expenditure not selected for review|
|Research and development credit†||$1,500||$2,200||$1,500||$5,200||Nonconforming||Yes|
|Total of all sales factor apportionments||490||1,160||908||2,558||State‑exclusive||No longer a tax expenditure‡|
|Water’s edge election||1,000||850||700||2,550||State‑exclusive||Yes|
|Enterprise zones and similar areas†||650||850||1,000||2,500||State‑exclusive||Tax expenditure repealed|
|Subchapter S corporations||400||270||220||890||Nonconforming||Yes|
|Like‑kind exchanges†||110||270||320||700||Conforming||No material state‑specific provisions|
|Accelerated depreciation of research and experimental costs†||130||110||120||360||Conforming||No material state‑specific provisions|
|Charitable contributions deduction||90||100||90||280||Conforming||No material state‑specific provisions|
|Film and television tax credit†||2||95||100||197||State‑exclusive||Yes|
|Low‑income housing credit†||60||70||50||180||Nonconforming||Yes|
|Minimum franchise tax exemption§||40||45||45||130||State‑exclusive||Yes|
|Jobs/hiring tax credit†||24||31||41||96||State‑exclusive||Tax expenditure repealed|
|Employee stock ownership plans†||40||27||27||94||Conforming||No material state‑specific provisions|
|Percentage depletion of mineral and other natural resources||23||22||24||69||Conforming||No material state‑specific provisions|
|Credit union treatment||6||18||20||44||Conforming||No material state‑specific provisions|
|Expensing of timber growing costs†||8||7||7||22||Conforming||No material state‑specific provisions|
|Reforestation†||NA||7||6||13||Conforming||No material state‑specific provisions|
|California Competes Tax Credit||NA||NA||0||0||State‑exclusive||Insufficient tax data available|
|Hiring credit (2013 Budget Act)||NA||NA||0||0||State‑exclusive||Insufficient tax data available|
|New advanced strategic aircraft hiring credi||NA||NA||0||0||State‑exclusive||Insufficient tax data available|
Sources: California State Auditor’s analysis and tax expenditure report by the Department of Finance (Finance) for fiscal year 2014–15.
* We determined whether each tax expenditure conformed directly with a federal expenditure, was similar to a federal expenditure but deviated in a meaningful way, or was exclusive to the State.
† Finance indicated that this item includes personal income tax amounts.
‡ Beginning in tax year 2013, businesses no longer have the option to choose between different sales factors. According to the Franchise Tax Board, this change means that this tax expenditure no longer exists.
§ In its tax expenditure reports, Finance refers to this tax expenditure as the tax‑exempt status for qualifying corporations, but it included forgone revenue from organizations deemed tax‑exempt by Internal Revenue Code Section 501, such as churches and nonprofits. We have included only forgone revenue from corporations claiming the exemption. This amount is for calendar year 2012 since this amount is derived from new corporations formed each calendar year. For added clarity, we also refer to this tax expenditure as the minimum franchise tax exemption.