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CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION

94

Introduced by Senator Gonzalez

(Coauthors: Senators Cortese, Durazo, and Pérez)

February 20, 2026

An act to add and repeal Section 43 of the Revenue and Taxation Code, relating to taxation.

Vote: majority   Appropriation: no   Fiscal committee: no   Local program: no

LEGISLATIVE COUNSEL’S DIGEST

Existing law, including, but not limited to, property tax law, the Sales and Use Tax Law, the Personal Income Tax Law, the Corporation Tax Law, the Motor Vehicle Fuel Tax Law, the law governing the taxation of insurers, the Use Fuel Tax Law, and the Diesel Fuel Tax Law, provides for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.

The bill would require the Legislative Analyst’s Office (LAO) to comprehensively assess the major tax expenditures, as defined, of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report. In this regard, the bill would require LAO, as part of the comprehensive assessments, to identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures, and require them to consider certain criteria when finalizing each report, including the extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.

The bill would require LAO to complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, January 1, 2028, and to complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter until the fifth and final report is submitted on January 1, 2032. The bill would require the Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation, to hold a joint public hearing on these reports by each August 15 of the second year of the legislative session, as specified. To the extent that LAO needs access to taxpayer data and information, the bill would require the Franchise Tax Board, the California Department of Tax and Fee Administration, and the Employment Development Department to ensure that relevant anonymized taxpayer data is made available and ensure that appropriate levels of data security and privacy protections are in place for transferred or sensitive data. The bill would repeal its provisions on January 1, 2033.

The bill would make findings and declarations relating to these provisions.

The people of the State of California do enact as follows:

SECTION 1.

The Legislature finds and declares all of the following:

(a) California’s publicly funded K–14 education system is dependent on state revenues, including personal, corporate, sales, and use taxes.

(b) The Legislature has consistently advanced tax expenditures, including credits and sales and use tax exemptions to accomplish market and policy goals. While these expenditures have been put in place with the goal of achieving certain policy objectives, they have the effect of reducing revenue to the General Fund which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.

(c) Given the fact that Proposition 98 was suspended twice during the last recession, and again in 2023-2024, thousands of teachers lost jobs, and millions of California’s students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that California’s dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.

(d) The California State Auditor released an audit in 2015 on six of the largest tax expenditures in California and found a lack of oversight or evaluation has resulted in insufficient evidence to determine if some tax credits and exemptions are fulfilling their purpose to provide economic benefit to California.

(e) In 2016, the California State Auditor questioned whether some of California’s revenue going toward some tax expenditures is being well spent or if these funds could be better allocated to fulfill the same policy objectives or if improvements can be made to make them more effective.

(f) Tax expenditures have been created to provide an economic benefit to California as well as to create incentives to achieve particular goals and outcomes. It is imperative for California to ensure the billions of dollars allocated to these outcomes are being well spent to justify the reductions in critical education and public policy programs.

(g) California has a number of major tax expenditures that have resulted in over $1,000,000,000 of foregone revenue in the last 10 fiscal years which do not have an inoperative date nor a requirement for any metrics of efficacy.

(h) It is the intent of the Legislature to identify opportunities for reduction or repeal of major tax expenditures that are no longer meeting their purpose and to identify any potential savings to taxpayers.

SEC. 2.

Section 43 is added to the Revenue and Taxation Code, to read:

43.

(a) For the purposes of this section, “major tax expenditure” includes all of the following:

(1) The water’s-edge election allowed by Section 25110.

(2) The credits relating to increasing research activities allowed by Sections 17052.12 and 23609.

(3) The change in cost basis of inherited property pursuant to rules relating to gain or loss from the sale or other disposition of property prescribed in Sections 18031 and 24911.

(4) The exclusion from recognition of gain or loss on the exchange of property held for productive use or investment, also known as like-kind exchange, pursuant to the rules prescribed by Sections 18031 and 18031.5 of the Personal Income Tax Law (Part 10 (commencing with Section 17001) of Division 2) and Sections 24941 and 24941.5 of the Corporation Tax Law (Part 11 (commencing with Section 23001) of Division 2).

(5) The deductions relating to accelerated depreciation of research and experimental costs allowed pursuant to rules prescribed by Sections 17201 and 17201.1.

(6) The special apportionment of business income for qualified cable system operators pursuant to Section 25136.1.

(b) The Legislative Analyst’s Office shall comprehensively assess the major tax expenditures of the state, write and publish a report on each major tax expenditure, and make a recommendation to the Legislature based on each report, pursuant to this section.

(c) As part of the comprehensive assessments, the Legislative Analyst’s Office shall identify any savings that the Legislature can realize by reducing or limiting the major tax expenditures. The Legislative Analyst’s Office shall consider all of the following criteria when finalizing each report:

(1) The extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.

(2) An analysis of the major tax expenditure’s effect on the General Fund, including Proposition 98.

(3) An analysis of the major tax expenditure’s effect on employment, wages, and the state’s economy.

(4) Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, or if no such opportunities exist, whether the Legislature should enact legislation to repeal each major tax expenditure.

(d) The Legislative Analyst’s Office shall complete and publish on its internet website its first report on a major tax expenditure by October 15, 2027, January 1, 2028, and shall complete and publish on its internet website each subsequent report on a major tax expenditure annually in a sequence determined by the office thereafter, until the fifth and final report is submitted on January 1, 2032. Each report shall additionally be submitted to the Legislature in compliance with Section 9795 of the Government Code.

(e) The Senate Committee on Revenue and Taxation and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the first report submitted pursuant to subdivision (d) by August 15, 2028, and a joint public hearing on the two most recent reports submitted pursuant to subdivision (d) by each August 15 of the second year of the legislative session thereafter.

(g) This section shall remain in effect only until January 1, 2033, and as of that date is repealed.