BILL ANALYSIS AB 1938 Page 1 Date of Hearing: May 5, 2008 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Charles Calderon, Chair AB 1938 (Plescia) - As Introduced: February 12, 2008 Majority vote. Tax levy. Fiscal committee. SUBJECT : Personal income taxes: credits: spaying or neutering SUMMARY : Allows a personal income tax credit for costs paid to spay or neuter a cat or dog. Specifically, this bill : 1)Provides, for each taxable year beginning on or after January 1, 2008, a credit shall be allowed against a taxpayer's net tax in an amount equal to 25% of the amount paid or incurred by a taxpayer for "qualified costs" to spay or neuter a cat or dog. 2)Provides that the credit shall be limited to the "qualified costs" paid or incurred by a taxpayer for no more than two spaying or neutering operations per calendar year. 3)Defines "qualified costs" as both of the following: a) The actual costs of the spaying or neutering operation; and, b) The actual costs of any followup care associated with the spaying or neutering operation. 4)Allows any unused credit to be carried over until exhausted. 5)Takes immediate effect as a tax levy. EXISTING LAW provides various tax credits designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses. FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that this bill would reduce state revenues by $2 million per year. Proposition 98 Fiscal Effect : Committee staff estimates that AB 1938 Page 2 this bill would reduce K-14 funding by $800,000 in each of the next three fiscal years. COMMENTS : 1)The author states that this bill, "encourages people to spay and neuter their pets by authorizing an annual tax credit equal to 25% of the aggregate amount paid." Furthermore, the author states that this bill would alleviate the increasing problem of abandoned cats and dogs in the State of California. 2)Proponents state, "This legislation would provide much-needed incentives for Californians to spay or neuter their dogs and cats, which would help reduce the number of unwanted pets and therefore reduce costs to local animal shelters. Recognizing that spay/neuter costs can be significant for many pet owners, we believe that providing some monetary relief from those costs is entirely appropriate. It should be noted that, rather than creating new regulations which typically fail to target problem breeders or create unintended consequences, AB 1938 would appropriately encourage pet owners to be responsible in ensuring that their dogs or cats do not contribute to the pet overpopulation problem." 3)Opponents state, "This bill would authorize a tax credit in an amount equal to 25% of the aggregate amount paid or incurred by a taxpayer for specified costs associated with spaying or neutering a cat or dog, which would, in effect, result in an expenditure and subsequent revenue loss at the state and local levels." 4)FTB notes that this bill: a) Limits the credit to the spaying or neutering costs for up to two operations per calendar year. Thus, a couple that files a joint tax return may claim this credit for up to four operations - two per taxpayer. The author may wish to amend this bill to clarify whether the credit should be limited to two operations per tax return, or per taxpayer. b) Provides that "qualified costs" would include costs for "followup care" associated with the spay or neuter operation. The term "followup care", however, is not defined. To eliminate confusion and reduce taxpayer AB 1938 Page 3 disputes, the author may wish to clarify this term. c) Would allow taxpayers in certain circumstances to claim multiple tax benefits for the same item of expense. To eliminate this concern, this bill could be amended to specify that the credit allowed under this section would be taken in lieu of any other credit or deduction allowed for the same expenses. 5)Committee staff notes: a) Because this credit is not limited to individuals earning a specified amount, it would be available to taxpayers who require no financial incentive to spay or neuter their pets. b) This bill does not require the spaying or neutering operation to occur in California. As such, a pet owner could offset his/her California source income by taking a credit for a pet operation done outside the state. c) This bill would apply to taxable years beginning on or after January 1, 2008. Thus, this bill would allow certain taxpayers to take a credit for pet operations undertaken before this bill's enactment. The author may wish to amend the bill's operative date to bring the bill in line with the stated intent of incentivizing future conduct. d) Many local governments already provide subsidized spay and neutering services. For example, the City of Sacramento provides free spay and neuter clinics for the pets of low-income residents. e) This bill lacks a sunset date to allow periodic review of this tax expenditure in the future. f) This bill does not limit the number of years for the carryover period. As such, FTB would be required to retain the carryover on the tax forms indefinitely. Recent credits have been enacted with a carryover period limitation because credits are typically exhausted within eight years of being earned. g) SB 430 (Vincent), introduced during the 2001-02 Legislative Session, would have provided a credit for AB 1938 Page 4 spaying or neutering a cat or dog purchased or adopted by the taxpayer. SB 430 failed to pass out of the Senate Revenue and Taxation Committee. REGISTERED SUPPORT / OPPOSITION : Support Animal Switchboard The California Outdoor Heritage Alliance The California Veterinary Medical Association The League of Humane Voters Opposition California Professional Firefighters Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098