Taxation: tax expenditures: Legislative Analyst's Office: assessment, report, and recommendation.

The deadline for LAO's first report on a major tax expenditure was finalized as January 1, 2028. The prior version contained both 'October 15, 2027' and 'January 1, 2028,' suggesting an earlier amendment date that was superseded.

A duplicate subdivision letter (two subdivisions both labeled '(f)') in the prior version was corrected to proper sequential numbering: data access provision is now subdivision (f) and the sunset clause is subdivision (g).

Assembly Member Ahrens was added as a coauthor of the bill.

The deadline for LAO's first report on a major tax expenditure was changed from October 15, 2027 to January 1, 2028, giving the office roughly two and a half additional months.

The reporting schedule language was clarified to specify that exactly five reports will be produced in total, with the fifth and final report due January 1, 2032, rather than simply stating reports would be published annually thereafter.

A new subdivision (f) requires the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department to make relevant anonymized taxpayer data available to LAO and to ensure appropriate data security and privacy protections for transferred or sensitive data.

The former sunset provision (subdivision f) was relettered to subdivision (g) to accommodate the new data access provision. Assembly Member Ahrens was added as a coauthor.

The definition of 'major tax expenditure' was changed from a broad criteria-based test (foregone revenue of $1 billion or more over 10 fiscal years, no repeal date, no efficacy reporting requirement, plus several exclusions) to a narrow list naming exactly six specific tax expenditures: the water's-edge election, research activity credits, inherited property cost basis step-up, like-kind exchange exclusion, accelerated depreciation of research and experimental costs, and cable system operator apportionment.

The sunset provision was changed from a floating date (inoperative 6 months after the hearing, repealed the following January 1) to a fixed date: the section remains in effect only until January 1, 2033, and is repealed as of that date.

The first public hearing deadline was specified as August 15, 2028 (on the first report), with subsequent hearings on the two most recent reports by each August 15 of the second year of the legislative session thereafter. The Senate version only said 'by August 15 of the second year of the legislative session' without a specific first date.

The detailed list of items that each comprehensive assessment's scope must include (legislative intent, beneficiaries, number of returns, federal comparables, prior evaluations, environmental impacts, long-term beneficiary analysis, jobs created with demographic breakdowns) was removed entirely from the Assembly version.

The criteria LAO must consider when finalizing each report were expanded from two items (General Fund impact and a positive/negative impact assessment) to four items: cost-effectiveness compared to alternatives, effect on General Fund including Proposition 98, effect on employment/wages/economy, and whether the Legislature should repeal the expenditure if it cannot be improved.

The requirement that any other state agency assist LAO with its assessments 'to the maximum degree practicable' was removed.

Report submission was changed from requiring delivery to four specific committees (Senate Budget and Fiscal Review, Senate Revenue and Taxation, Assembly Budget, Assembly Revenue and Taxation) to a general requirement to submit to the Legislature in compliance with Section 9795 of the Government Code.

The fiscal committee vote was changed from 'yes' to 'no,' indicating the Assembly determined the bill does not require a fiscal committee recommendation.

Additional coauthors were added: Senators Cortese, Durazo, and Perez; and Assembly Members Bonta, Connolly, Garcia, Haney, McKinnor, and Ortega.

The reporting timeline changed from a single comprehensive report due by January 1, 2029, to an ongoing process with the first report due by October 15, 2027, and subsequent reports published annually thereafter as determined by LAO.

The sunset provisions were removed. The old version made the section inoperative six months after the joint public hearing and repealed it the following January 1, with an inoperative date of January 1, 2033. These are no longer present in the new version.

The definition of 'major tax expenditure' was replaced. The old version used a criteria-based approach (foregone revenue of $1 billion or more over 10 fiscal years, no repeal date, no efficacy reporting requirement, plus multiple exclusions for specific tax provisions). The new version replaces this with a fixed list of six specifically named tax expenditures: the water's-edge election, research activity credits, inherited property cost basis change, like-kind exchange exclusion, accelerated depreciation of R&D costs, and special apportionment for cable system operators.

The detailed 11-item scope requirements for each assessment (legislative intent, beneficiaries, number of returns, federal comparables, prior evaluations, economic benefits, General Fund impact, Proposition 98 impact, environmental impacts, long-term beneficiary analysis, and jobs data with demographics) were removed from the operative section and replaced with a simpler 4-item criteria list.

Two new legislative findings were added: (g) stating that California has major tax expenditures resulting in over $1 billion in foregone revenue over the last 10 fiscal years with no inoperative date or efficacy metrics, and (h) declaring the Legislature's intent to identify opportunities for reduction or repeal of major tax expenditures no longer meeting their purpose.

The fiscal committee designation changed from 'yes' to 'no,' indicating the bill no longer requires fiscal committee review, likely because the ongoing annual reporting structure reduces the immediate fiscal impact compared to a one-time report.

The entire California Tax Expenditure Review Board (former Section 42) is eliminated. This removes the creation of a new five-member advisory body composed of the Controller, Legislative Analyst, California State Auditor, Director of Finance, and a Government Operations designee, along with all its powers including setting schedules, holding public meetings, determining assessment scope, posting reports on a website, voting on recommendations (requiring 3 of 5 members), and establishing advisory committees.

All responsibilities previously split between the board and LAO are now assigned solely to LAO. LAO must write and publish the comprehensive report by January 1, 2029, identify savings from reducing or limiting major tax expenditures, consider General Fund impact and economic/social/environmental criteria, submit the report to legislative committees, and make recommendations to the Legislature.

The requirement for a public meeting by October 1, 2027 (to determine the assessment schedule) and the board meeting by January 31, 2028 (to finalize the schedule) are both eliminated. The only remaining deadline is LAO's January 1, 2029 report date.

The joint public hearing requirement now involves only the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation (previously it also included the Senate Committee on Governance and Finance). The hearing must occur by August 15 of the second year of the legislative session.

The definition of 'major tax expenditure' is moved from the removed Section 42 into Section 43, but the substantive criteria remain unchanged: foregone revenue of $1 billion or more over 10 fiscal years, with specific exclusions for certain sales and use tax exemptions, personal income tax-only credits, and federal conformity provisions.

LAO now must write and publish a report by January 1, 2029 that comprehensively assesses major tax expenditures and make a recommendation to the Legislature based on that report. Previously, only the board made recommendations.

LAO must identify any savings that the Legislature can reduce or eliminate from major tax expenditures as part of its comprehensive assessments.

LAO's recommendation to the Legislature must include specific information: cost-effectiveness compared to alternatives, General Fund impact, effect on employment/wages/economy, and whether opportunities exist to improve or repeal each major tax expenditure.

The joint public hearing on the final report is now required to be held by the Senate Committee on Revenue and Taxation (previously the Senate Committee on Governance and Finance) and the Assembly Committee on Revenue and Taxation.

A new sunset provision makes the reporting requirement inoperative on January 1, 2033, pursuant to Section 10231.5 of the Government Code.

The jobs analysis requirement is narrowed from 'jobs created by the tax expenditure' to 'jobs in California created by the tax expenditure,' adding a geographic limitation.

Assembly Member Mark Gonzalez was added as co-author of the bill.