Appendix

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shows that many tax expenditures presented in Finance’s reports were not good candidates for review because they were no longer in effect, they conform to federal law and thus are not state‑only corporate income tax expenditures, or they were enacted so recently that sufficient data do not exist. We did not consider tax expenditures that are no longer in effect because doing so would offer little value to the Legislature.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

Table
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.