May 18, 2010
Transactions and Regulatory Committee
Taxation and Government Finance Committee
The following is for study only and has NOT been approved by the Transactions and Regulatory Committee, Legislative or Executive Committees or the Board of Directors.
Issue:
Should the Franchise Tax Board (FTB) be able to suspend the professional or occupational license of an individual who has failed to pay their income taxes?
Action:
Optional.
Options:
1. Oppose legislation that would allow the FTB to suspend the license of an individual who fails to pay their income taxes.
2. Support legislation that would allow the FTB to suspend the license of an individual who fails to pay their income taxes.
3. Other.
4. Do Nothing.
Status/Summary:
Assembly Bill 2038 will authorize state licensing entities and the Franchise Tax Board (FTB) to suspend occupational and professional licenses due to unpaid income tax liabilities. The license suspension could occur only after a state tax lien has been recorded. Currently, several steps precede recordation of a tax lien including the FTB attempting to recover funds through a bank levy and, failing that, an order from the FTB to withhold pay. FTB data indicates that there are over 25,000 occupational or professional licensees who are delinquent in paying their income taxes. Opponents of the measure argue that it makes no sense whatsoever to eliminate a taxpayer’s ability to pay a tax liability by suspending their license due to unpaid income taxes. While the threat of a suspension may encourage some to pay their taxes, opponents argue that AB 2038 also has the potential to push well-intentioned licensees into bankruptcy.
Discussion
Earlier this year, Assembly Member Mike Eng introduced Assembly Bill 2038. This measure will authorize the Franchise Tax Board (FTB) and state licensing entities to suspend occupational and professional licenses due to unpaid income tax liabilities. The licensee can avoid suspension if they enter into an installment payment agreement or by showing the FTB that they would experience financial hardship if their license is suspended. “Financial hardship” means that the licensee would be unable to pay any part of the outstanding tax liability and unable to qualify for an installment payment plan.
The license suspension could occur only after a state tax lien has been recorded. Currently, several steps precede recordation of a tax lien. The FTB first sends the taxpayer a notice of proposed assessment as the result of nonpayment of income tax. The taxpayer then has 60 days to contest the notice. Once the taxpayer has exhausted their administrative remedies, the FTB sends a notice of income tax due and then a final notice. The FTB will then attempt to recover the funds through a bank levy and, failing that, through an order to the employer to withhold pay. It is only after these attempts have failed that the FTB records a tax lien.
AB 2038 is intended to address the annual income tax gap which the FTB estimates at $6.5 billion of which $1.4 billion is the result of uncollected tax liabilities from professional and occupational licensees. Current FTB data indicates that there are over 25,000 occupational or professional licensees who are delinquent in paying their income taxes. According to the author of the bill, “These tax cheats are habitual debtors with large delinquent amounts who have received numerous notices of its [sic] delinquent account and still fail to provide any form of payment.” Interestingly, the FTB estimates revenue gains from AB 2038 of only $12.5 million in fiscal year 2010-11, $18.5 million in 2011-12, and $18.4 million in 2012 -13. However, given a budget deficit of almost $20 billion, it would likely be difficult to defeat AB 2038.
Opponents of the measure argue that it makes no sense whatsoever to eliminate a taxpayer’s ability to pay a tax liability by suspending their license due to unpaid income taxes. While the threat of a suspension may encourage some to pay their taxes, opponents argue that AB 2038 also has the potential to push well-intentioned licensees into bankruptcy.
The only instance in which licenses can now be suspended in California is for non-payment of child support. As for other states, the tax laws for Illinois, Massachusetts, Minnesota, Missouri, Oregon, Pennsylvania and Wisconsin provide for the suspension of licenses for unpaid income tax liabilities.
