MODEL BILLS

Tax Expenditure Sunset Act

Summary: The Tax Expenditure Sunset Act requires that all new tax expenditures shall automatically expire in five years unless renewed, and all preexisting tax expenditures shall be reviewed.

NOTES: Most states and many cities have some kind of periodic report on tax expenditures, but very few are regular and rigorous. A state-by-state list can be found here. At present, the state of Oregon and the City of New York may provide the best models.

[This model is based in part on California SB 508 (2011) and in part on the ALICE Model Tax Expenditure Sunset and Review Act.]

SECTION 1. SHORT TITLE

This Act shall be called the “Tax Expenditure Sunset Act.”

SECTION 2. FINDINGS AND PURPOSE

(A) FINDINGS—The legislature finds that:

1) A tax expenditure is a form of government spending, and yet, the public is generally unaware of its form and scope.

2) All government spending should receive the same scrutiny. And yet, while budget line items are reviewed and adjusted every year, there are insufficient mechanisms for reviewing tax expenditures.

3) Many tax expenditures may have been justified when enacted but no longer make economic sense.

4) To bring greater fairness to the system, each tax exemption, deduction and credit should be examined periodically to weigh its costs, benefits and relevance to public goals. That requires each to undergo a periodic review and be re-approved through the legislative process.

(B) PURPOSE—This law is enacted to make fairer and improve the system of taxation.

SECTION 3. TAX EXPENDITURE SUNSET

After section XXX, the following new section XXX shall be inserted:

(A) DEFINITIONS—In this section:

“Tax expenditure” means any tax provision which exempts, in whole or in part, certain persons, income, goods, services, or property from the impact of established taxes, including, but not limited to tax deductions, tax allowances, tax exclusions, tax credits and tax exemptions.

(B) EXPIRATION OF TAX EXPENDITURES

A tax expenditure created after enactment of this section shall expire five years after its effective date, unless it is scheduled to expire earlier.

(C) CREATION OR RENEWAL OF TAX EXPENDITURES—An act creating or renewing a tax expenditure shall specify:

1) The specific goals, purposes, and objectives that the tax expenditure will achieve;

2) Detailed performance indicators for the [legislature/council] to use when measuring whether the tax expenditure meets the goals, purposes, and objectives stated in the act; and

3) Data collection requirements to enable the [legislature/council] to determine whether the tax expenditure is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the tax expenditure is in effect, in order for the [legislature/council] to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data.

(D) REVIEW OF PREEXISTING TAX EXPENDITURES

1) All tax expenditures created before enactment of this section shall be reviewed by a Tax Expenditure Review Commission, unless a tax expenditure is scheduled to expire within five years of enactment of this section.

2) The Tax Expenditure Review Commission (hereinafter the “Commission”) shall consist of 11 members as follows:

a) Two senators appointed by the [President of the Senate];

b) Two representatives appointed by the [Speaker of the House];

c) Seven public members appointed jointly by [the President of the Senate and the Speaker of the House] including at least one member with expertise in taxation, one member who is knowledgeable about [state’s] budget process, one member who represents business interests, and one member who represents labor interests.

3) The public members of the Commission may receive compensation for per diem or reimbursement for travel or other expenses incurred in serving on the Commission.

4) The House [Ways and Means] and Senate [Budget] Committees shall assign committee staff to provide support services for the Commission.

5) As part of its study, the Commission shall conduct a series of hearings [around the state].

6) The study shall include:

a) A list of tax expenditure reviewed by the Commission;

b) An explanation of the purposes of each tax expenditure and an opinion of whether the tax expenditure met its purpose;

c) An estimate of the amount of tax revenue lost each fiscal year as a result of each tax expenditure;

d) An opinion of whether and why the tax expenditure should be continued or ended; and

e) Any recommendations for changes in overall laws or policies related to the creation, renewal, evaluation or review of tax expenditures.

7) The Commission shall report the results of this study on or before [January 1, 20XX].

SECTION 4. EFFECTIVE DATE

This Act shall take effect on July 1, 20XX.