BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 233
                                                                  Page  1

          Date of Hearing:  May 18, 2009

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                             Charles M. Calderon, Chair

                      AB 233 (Smyth) - As Amended:  May 4, 2009

                                      SUSPENSE
          
          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Personal income tax:  deductions:  pet adoption costs

           SUMMARY  :  Allows a deduction under the Personal Income Tax Law  
          for qualified costs paid or incurred by a taxpayer for the  
          adoption of a pet from a qualified animal rescue organization.   
          Specifically,  this bill  :

          1)Allows a deduction, for each taxable year beginning on or  
            after January 1, 2010, and before January 1, 2015, for  
            "qualified costs" paid or incurred during the taxable year by  
            a taxpayer for the adoption of a "pet" from a "qualified  
            animal rescue organization".  

          2)Defines the term "pet" as "an animal adopted from a qualified  
            animal rescue organization that is not used by the taxpayer in  
            a trade or business or for the production of income".  

          3)Defines the term "qualified animal rescue organization" as "a  
            public animal control agency or shelter, humane society  
            shelter, or rescue group".  The term "rescue group", in turn,  
            is defined as a "not-for-profit entity, as defined in Section  
            501(c)(3) of the Internal Revenue Code, whose primary purpose  
            is the placement of dogs, cats, or other animals that have  
            been removed from a public animal control agency or shelter,  
            society for the prevention of cruelty to animals shelter, or  
            humane society, or that have been surrendered or relinquished  
            to the entity by the previous owner".  

          4)Defines "qualified costs" as "amounts paid or incurred to a  
            qualified animal rescue organization to adopt a pet, not to  
            exceed one hundred dollars ($100)".  

          5)Provides that the deduction allowed for a taxable year shall  
            not exceed $100.  








                                                                  AB 233
                                                                  Page  2


          6)Provides that the deduction may not be treated as a  
            miscellaneous itemized deduction under Internal Revenue Code  
            (IRC) Section 67(a).  

          7)Takes immediate effect as a tax levy.  

           EXISTING LAW  :

          1)Allows individuals to deduct either a fixed amount, indexed  
            for inflation, known as the standard deduction, or the amount  
            of a taxpayer's itemized deductions, whichever is greater.   
            Certain expenses, such as medical expenses, charitable  
            contributions, interest, and taxes, are deductible as itemized  
            deductions.  The law also provides for "miscellaneous itemized  
            deductions", which are those itemized deductions not  
            specifically listed in IRC Section 67(b).  As a general rule,  
            miscellaneous itemized deductions are allowed only to the  
            extent that the aggregate of such deductions exceeds 2% of  
            adjusted gross income (AGI).   
            
          2)Provides no tax benefit in connection with the adoption of a  
            pet from an animal shelter or nonprofit animal welfare  
            organization.  

           FISCAL EFFECT  :  The Franchise Tax Board (FTB) estimates that  
          this bill would reduce General Fund (GF) revenues by $200,000 in  
          fiscal year (FY) 2009-10, $1 million in FY 2010-11, and $1.2  
          million in FY 2011-12.  

           COMMENTS  :   

          1)The author states, "California is one of the friendliest  
            states in the nation in how we treat animals, thanks in large  
            part to legislation like SB 1785 passed in 1998 that set out  
            critical protections for animals in shelters.  Unfortunately,  
            sheltering pets continues to be a huge financial burden to  
            local governments, costing them an estimated quarter of a  
            billion dollars every year.  With home foreclosures  
            increasing, many families are abandoning their pets, putting  
            even more pressure on overpopulated shelters."  The author  
            goes on to state, "AB 233 encourages individuals to adopt pets  
            from these shelters in an effort to ease these enormous costs  
            to local governments with the added benefit of decreasing the  
            overpopulation shelters are contending with on a daily basis."  








                                                                  AB 233
                                                                  Page  3

             

          2)The sponsor states, "While the tax deduction provision that AB  
            233 would create cannot address all that ails our state's  
            homeless pets and the agencies vested with looking out for  
            their interests, it is a relatively inexpensive and efficient  
            way to send a strong message to California taxpayers:  that  
            never before has their compassion been more critical to  
            improving the chances for animals who have done nothing wrong  
            other than prove too expensive for their downtrodden owners.   
            AB 233 asks Californians to help out, and by promoting the  
            benefits - to the animals and to the government and charitable  
            sectors - of adopting rather than purchasing dogs and cats,  
            the deduction would increase the ability of municipal and  
            charitable animal protection organizations to continue their  
            life-saving work."  The sponsor goes on to state, "Rather than  
            distributing additional government funds to all animal  
            shelters, a tax deduction puts the power in the taxpayer's  
            hands - and to the extent they [choose] to adopt, they will be  
            rewarded (however modestly) by the state for doing so."   

          3)Proponents state, "Every year, local governments in California  
            spend $250 million sheltering animals.  Meanwhile, each year  
            nearly 800,000 animals are abandoned in the state leaving  
            local governments responsible for their care and unfortunately  
            euthanasia as well.  A tax deduction will likely encourage  
            individuals and families looking for a pet to visit their  
            local shelters, thereby helping to relieve the pressure on  
            these facilities."  

          4)Opponents state, "As a matter of tax policy, we do not believe  
            it makes sense to give a tax deduction for pet adoption.  This  
            could potentially open up a tax loophole that could end up  
            harming many more animals than it helps.  [This] bill would  
            create an incentive to adopt pets but not necessarily ensure  
            that the pets are properly cared for.  Taxpayers could  
            potentially adopt pets to reduce their tax bill and then  
            either set the pet free or take it to another animal shelter.   
            Enforcement would be a real issue and not worth taxpayer  
            expense.  In addition, given the state's budget deficit, the  
            state cannot afford to grant this tax break."  

          5)FTB notes that:

             a)   A review of Illinois, Massachusetts, Michigan,  








                                                                  AB 233
                                                                  Page  4

               Minnesota, and New York laws found no comparable tax  
               deduction for pet adoption costs.  

             b)   This bill would allow a taxpayer to deduct pet adoption  
               costs as a miscellaneous itemized deduction not subject to  
               the 2% of AGI limitation on such deductions.  

          6)Committee Staff Comments:

              a)   A clear need  :  As the author notes, "With home  
               foreclosures increasing, many families are abandoning their  
               pets, putting even more pressure on overpopulated  
               shelters."  It should be noted, however, that this  
               Committee just voted out a bill [AB 47 (Ma)] that expands  
               the existing adoption tax credit to encourage the adoption  
               of children from foster care.  AB 47 reduced GF revenues by  
               $45,000 each year.  While the goal of encouraging pet  
               adoptions is laudable, the author may wish to consider  
               amendments to reduce the cost associated with this tax  
               expenditure.   
              
              b)   Definitional language  :

               i)     As noted above, this bill defines the term  
                 "qualified animal rescue organization" as "a public  
                 animal control agency or shelter, humane society shelter,  
                 or rescue group".  It is somewhat unclear, however, what  
                 is meant by the term "humane society shelter".  Committee  
                 staff is informed that this term refers generally to  
                 non-profit organizations dedicated to sheltering and  
                 placing animals.  If this is correct, the use of the term  
                 would seem somewhat redundant, given the inclusion of the  
                 term "rescue group" which is defined as a "not-for-profit  
                 entity, as defined in Section 501(c)(3) of the Internal  
                 Revenue Code, whose primary purpose is the placement of  
                 dogs, cats, or other animals that have been removed from  
                 a public animal control agency or shelter, society for  
                 the prevention of cruelty to animals shelter, or humane  
                 society . . . . "  

               ii)    This raises a second, technical question.  In  
                 referring to a "society for the prevention of cruelty to  
                 animals shelter", is the author referring specifically to  
                 a shelter run by or affiliated with the American Society  
                 for the Prevention of Cruelty to Animals, or is this also  








                                                                  AB 233
                                                                  Page  5

                 intended to be a more generic term?

              c)   Prior Legislative Efforts  :

               i)     AB 373 (Leach), introduced in the 2001-02  
                 Legislative Session, would have allowed a taxpayer to  
                 deduct veterinary service expenses for an animal adopted  
                 from an animal shelter or a nonprofit animal welfare  
                 organization.  AB 373 failed passage from the Senate  
                 Revenue and Taxation Committee. 

               ii)    SB 430 (Vincent) of the 2001-02 Legislative Session  
                 would have provided a credit for spaying or neutering a  
                 cat or dog purchased or adopted by the taxpayer.  SB 430  
                 died in committee.   



           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Humane Society of the United States (sponsor)
          American Society for the Prevention of Cruelty to Animals
          Born Free USA
          California Animal Association
          California Animal Control Directors Association 
          City of West Hollywood
          County Health Executives Association of California
          Friends of Auburn/Tahoe Vista - Placer County Animal Shelter 
          Happy Tails Pet Sanctuary
          Humane Society Veterinary Medical Association 
          Paw Pac
          People for the Ethical Treatment of Animals
          Pet Industry Joint Advisory Council
          San Diego Animal Advocates
          State Humane Association of California
          The Paw Project
          United Animal Nations
          WOOFF (Welfare of Our Furry Friends)
          2 individuals

           Opposition 
           
          California School Employees Association, AFL-CIO








                                                                  AB 233
                                                                  Page  6

          California Tax Reform Association
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098