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California State Auditor Report Number: 2015-127

Corporate Income Tax Expenditures
The State’s Regular Evaluation of Corporate Income Tax Expenditures Would Improve Their Efficiency and Effectiveness


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shows that many tax expenditures presented in Finance’s reports were not good candidates for review because they were no longer in effect, they conform to federal law and thus are not state‑only corporate income tax expenditures, or they were enacted so recently that sufficient data do not exist. We did not consider tax expenditures that are no longer in effect because doing so would offer little value to the Legislature.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.

Selection of the Six Most Costly State‑Only Tax Expenditures, According to the California Department of Finance’s Most Recent Tax Expenditure Report
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
Totals $4,573 $6,132 $5,178 $15,833

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.

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