Tax Policy – California Senate Bill Seeks Tax Credit Transparency from Large Corporations but Misses the Mark
If enacted, California Senate bill SB 972 would require the public posting of an annual list of corporate taxpayers whose gross receipts met or surpassed $5 billion in the previous year, starting in 2021. The list would “include the name and tax liability of each taxpayer, the taxable year for which the return is filed, the gross receipts for that taxable year, and the amount of credits claimed for that taxable year.” The bill currently sits in the Senate Appropriations Committee and still needs a vote by the full California Senate.
The list would be based on gross receipts attributable to California, rather than profits. Gross receipts are not a good indicator of a business’s profitability, as they do not take into account the cost of goods sold or any other expenses incurred to generate income. Walmart, for example, had a gross revenue of $514.4 billion in calendar year 2019 but netted only $6.7 billion in profits after such expenses as wages, cost of goods sold, and utilities. Only 1.29 percent of gross revenue turned into profit.
Using net income as a measure instead of gross receipts better shows a company’s profitability. Even so, there are more factors—like a business’s investment in long-term, immovable capital—that aren’t easily captured in a one-year income snapshot.
This bill also raises issues of taxpayer privacy, as sharing gross receipts numbers with the public would disclose information found on federal tax returns. Federal laws and the IRS Taxpayer Bill of Rights prohibit the disclosure of “return information” and any information shared with the IRS except in very particular circumstances; what California would be seeking would involve disclosure of information shielded by federal law. The California Franchise Tax Board guarantees similar privacy on a state level in its Taxpayer Bill of Rights, stating, “We keep confidential the information you provide us on your state income tax returns and the amounts you owe us.”
Transparency is essential for economic development programs, but this particular bill creates more problems than it solves. Its focus on gross receipts would not accurately represent the profitability of companies and would likely create legal issues regarding privacy. At the same time, it fails to provide much useful information about the effectiveness of corporate tax incentives. These incentive programs pick winners and losers and disrupt economic decision-making, and evaluation of the relative effectiveness of those programs is what’s important. Simply disclosing this taxpayer information sheds no light on how those incentives are performing or which are the most wasteful.
California would do well to better evaluate those incentives following the lead of other states, and in the long term, focus on lessening the corporate tax burden across-the-board rather than carving out its base through targeted incentives.