BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 279
                                                                  Page  1

          Date of Hearing:  April 20, 2009

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

                    AB 279 (Duvall) - As Amended:  March 18, 2009


                                       AMENDED
          
          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Income taxes:  credit:  Great Schools Tax Credit Act. 

           SUMMARY  :  Allows a tax credit in an amount equal to any  
          contribution made by a taxpayer to scholarship granting  
          organizations.  Specifically,  this bill  :  

          1)Authorizes a tax credit for taxable years beginning on and  
            after January 1, 2010, equal to the amount of the total  
            contribution made by a qualified taxpayer to a scholarship  
            granting organization during the taxable year. 

          2)Specifies that the amount of tax credit may not exceed 50% of  
            the qualified taxpayer's tax liability.

          3)Defines all of the following terms:

             a)   "Qualified taxpayer" means an individual or corporate  
               taxpayer that files an income tax return in California and  
               is not claimed as a dependent for income tax purposes by  
               any other taxpayer. 

             b)   "Scholarship granting organization" means a tax-exempt  
               organization that provides "educational scholarships" to  
               "eligible students" attending "qualified schools" of their  
               parent's choice and has complied with all of the following  
               requirements to: 

               i)     Notify the Franchise Tax Board (FTB) of its intent  
                 to provide "educational scholarships" to "eligible  
                 students" attending "qualified schools";

               ii)    Provide FTB with the Internal Revenue Service's  
                 Letter of Determination of its tax-exempt status under  








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                 Internal Revenue Code (IRC) Section 501(c)(3);

               iii)   Provide the qualified taxpayer with a FTB-approved  
                 receipt substantiating the contribution made by the  
                 qualified taxpayer;

               iv)    Ensure that at least 90% of its revenue from  
                 donations is expended on "educational scholarships";

               v)     Spend a portion of expenditures each year on  
                 "educational scholarships" for students who qualify for  
                 free or reduced price lunch under the Richard B. Russell  
                 National School Lunch Act (42 U.S.C. Sec. 1751 et seq.)  
                 (Act) equal to the percentage of low-income eligible  
                 students in the county where the scholarship organization  
                 expends the majority of its "educational scholarships";

               vi)    Distribute periodic educational scholarship payments  
                 as checks made out to an "eligible student's" parent and  
                 mailed to the qualified school where the qualified  
                 student is enrolled;

               vii)   Cooperate with the FTB, or its designee, in  
                 conducting criminal background checks of all of the  
                 organization's employees and board members and exclude  
                 from employment or governance any individual who might  
                 reasonably pose a risk to the appropriate use of  
                 contributed funds;

               viii)  Demonstrate its financial accountability to the FTB  
                 by submitting a financial information report, conducted  
                 by a certified public accountant (CPA), that complies  
                 with uniform financial accounting standards and is  
                 certified by an auditor as free of material  
                 misstatements; 

               ix)    Demonstrate its financial accountability if the  
                 scholarship granting organization receives donation of  
                 $50,000 or more during the school year, by either filing  
                 a surety bond with FTB, or filing financial information  
                 with FTB demonstrating the financial viability of the  
                 organization; and

               x)     Ensure that educational scholarships are not  
                 provided to eligible students to attend a qualified  








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                 school with paid staff or board members, or relatives  
                 thereof, in common with the organization. 

             c)   "Educational scholarship" means a grant made to an  
               eligible student to cover all or part of the tuition and  
               fees, including transportation to a qualified school  
               outside of the eligible student's resident school district,  
               at either a public or private qualified school. 

             d)   "Eligible student" means either of the following:

               i)     A student who (1) is a member of a household whose  
                 total amount of income during the calendar year before  
                 he/she received an educational scholarship from the  
                 organization is lesser than an amount equal to two and  
                 one-half times the income standard used to qualify for a  
                 free or reduced lunch price under the Act; (2) was  
                 eligible to attend a public school in the semester  
                 preceding receipt of the educational scholarship or is  
                 attending school in California for the first time; and,  
                 (3) resides in California while receiving the educational  
                 scholarship; or, 

               ii)    A student who qualifies for free or reduced price  
                 lunch. 

             e)   "Parent" means a parent, a legal guardian, a  
               conservator, a person acting as a parent of a child, or any  
               other person with legal authority to act on behalf of the  
               child.

             f)   "Qualified school" means a public elementary or  
               secondary school located in California that is outside of  
               the eligible student's resident school district or a  
               nonpublic elementary or secondary school in this state that  
               complies with the requirements of this bill.   

          4)Disallows the credit if a qualified school that accepts  
            educational scholarships from a scholarship granting  
            organization fails to comply with all of the following  
            requirements:

             a)   Comply with all health and safety laws or codes that  
               apply to nonpublic schools;









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             b)   Obtain a valid occupancy permit for its grounds if  
               required by its municipality;

             c)   Certify that it will not discriminate in accordance with  
               Section 1981 of Title 42 of the United States (U.S.) Code;  
               and,

             d)   Provide academic accountability to the parents of  
               eligible students who receive educational scholarships by  
               regularly reporting to the parent on the student's  
               progress. 

          5)Requires a scholarship granting organization to report to the  
            FTB, on or before June 1 of each calendar year, the following  
            information prepared by a certified public accountant  
            regarding the previous calendar year's educational  
            scholarships:

             a)   The name and address of the scholarship granting  
               organization; 

             b)   The total number and dollar amount of contributions  
               received during the previous calendar year; and,

             c)   The total number and dollar amount of educational  
               scholarships awarded during the previous calendar year, the  
               total number and total dollar amount of educational  
               scholarships awarded during the previous year to eligible  
               students qualifying for the federal free and reduced price  
               lunch program, and the percentage of first-time recipients  
               of educational scholarships who were continuously enrolled  
               in a public school during the previous year.

          6)Requires the FTB to do all of the following:

             a)   Promulgate any rules and regulations necessary to  
               implement this bill;

             b)   Provide a standardized format for a receipt to be issued  
               by a scholarship granting organization to a qualified  
               taxpayer to indicate the value of a received contribution.   


             c)   Require a qualified taxpayer to provide a copy of the  
               receipt when claiming a credit under this bill;








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             d)   Provide a standardized format for scholarship granting  
               organizations to report the information relating to  
               qualified schools with paid staff or board members, or  
               relatives thereof, in common with the scholarship granting  
               organization; 

             e)   Conduct a financial review or audit of a scholarship  
               granting organization if in possession of evidence of  
               fraud;

             f)   Deny an organization the status of a "scholarship  
               granting organization" if the FTB establishes intentional  
               and substantial noncompliance;

             g)   Notify any affected eligible students and their parents  
               if a scholarship granting organization has been  
               disqualified from participating in the tax credit program;  
               and, 

             h)   Allow a "qualified taxpayer" to redirect a prorated  
               share of state income tax withholdings to a scholarship  
               granting organization of the qualified taxpayer's choice,  
               up to the maximum amount of allowed credit, including  
               carryover credits. 

          7)Allows a qualified taxpayer to carry forward the unused amount  
            of credit for the next four taxable years. 

          8)Takes effect immediately as a tax levy. 

           EXISTING FEDERAL LAW  provides low-cost or free school lunch  
          meals to qualified students, ages 4 to 18, via subsidies to  
          schools.  Under the Act, children from families with income at  
          or below 130% of the poverty level are eligible for free meals,  
          and those with incomes between 130% and 185% of the poverty  
          level are eligible for reduced-price meals.  For the period from  
          July 1, 2008 until June 30, 2009, 130% of the poverty level is  
          $27,560 for a family of four, and 185% of the poverty level is  
          $39,220. 

           EXISTING LAW:

           1)Provides various tax credits designed to either provide tax  
            relief for taxpayers who incur certain expenses or to  








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            influence taxpayers' behavior.  

          2)Allows individual and corporate taxpayers to deduct certain  
            expenses as itemized deductions. 

          3)Allows deductions for monetary charitable contributions or  
            gifts or property to qualified organizations formed for  
            religious, charitable, educational, scientific, or literary  
            purposes.  A charitable contribution is defined as a  
            contribution or gift made exclusively for public purposes.   
            Individual taxpayers can claim charitable contributions as an  
            itemized deduction and can deduct the greater of the standard  
            deduction or itemized deductions from their adjusted gross  
            income (AGI) when computing taxable income.  Corporate  
            taxpayers can claim charitable contributions up to 10% of the  
            corporation's taxable income, without regard to the amount of  
            charitable contribution, but the amount in excess of the 10%  
            limitation may be carried over for five years.

          4)Imposes limitations on the amount of deduction for individual  
            charitable contributions, depending on the individual's AGI  
            and the amount of contributions, the types of organizations  
            that receive the donations, and the type of property donated. 

           FISCAL EFFECT  :  The FTB staff estimates that this bill will  
          reduce state revenues by $190 million in fiscal year (FY)  
          2009-10, $650 million in FY 2010-11, and $1.2 billion in FY  
          2011-12. 

           COMMENTS  :   

          1)The author states that, "The gift of education is difficult to  
            put a price on and we should reward those who offer this gift.  
             Further, it allows students to attend the school that they  
            want to attend and that caters to their needs.  California has  
            the opportunity to join the six other states that offer this  
            special program to save state funds and gift quality education  
            to our students."  

          2)The purpose of this bill, according to the author, is to  
            provide an incentive to corporations and individuals to  
            contribute towards the education of our youth by providing  
            them with the funds necessary to acquire a good education.   
            This bill also allows eligible students to use those  
            scholarships to attend the public or non-public school of  








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            their choice.  

          3)The proponents argue that AB 279 will greatly benefit  
            California students by encouraging private investment in their  
            education and creating more education opportunities for the  
            deserving students.  The proponents state that, "?education is  
            a right, and is necessary for the human development of each  
            person", and the state should do everything possible to assist  
            parents in educating their children.  The burden of educating  
            children in today's economic climate has become an unbearable  
            one, even for middle class families.  AB 279 links communities  
            and schools to teach children, allowing students to access  
            better public as well as private schools - both of which are  
            now out of reach for many students.  

          4)The opponents argue that this bill creates a state subsidy for  
            private schools - an indirect voucher program accomplished  
            through a tax credit.  The opponents state that, while this  
            bill appears to assist economically disadvantaged students, it  
            does nothing more than drain precious state revenue away from  
            public schools.  The tax credit created by this bill does not  
            create nor does it retain jobs in California.  It simply  
            redirects much needed funds away from public schools and the  
            very students it deems to aid.  Furthermore, the opponents  
            contend that AB 279 is constitutionally suspect and undermines  
            Californians' religious liberties.  Finally, they claim that  
            AB 279 would do nothing to improve student education.  

          5)The Committee staff notes all of the following:

              a)   Tax credit versus voucher program  .  This bill utilizes  
               the California tax system as a means of funding schools  
               while delivering a subsidy to contributors of non-profit  
               organizations.  It seems that a similar goal - funding of  
               schools - could be achieved by a direct grant, or a voucher  
               program.  In fact, some contend that the proposed tax  
               credit is a backdoor voucher program, where the public  
               funds are used to subsidize private schools.  Given that  
               the public is less opposed to tuition tax credits than  
               vouchers, tax credits "are a viable option in many states  
               where effective voucher programs are likely to be struck  
               down on state constitutional grounds." (The Public  
               Education Tax Credit, Adam B. Schaeffer, Cato Institute,  
               Policy Analysis, No. 605, December 5, 2007, p. 3).  Mr.  
               Schaeffer further argues that, while vouchers and tax  








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               credits deliver similar results, the credits, in contrast  
               to vouchers, are "less likely to be challenged in court,  
               less likely to come with burdensome regulations, and less  
               likely to accumulate regulations over time."  Finally,  
               "under vouchers, any case of dissatisfaction must engage  
               the political process and coerce an outcome," whereas tax  
               credits "allow the free exchange of funds and services? and  
               an education market without the need for coercion." (Id. at  
               p. 6).

              b)   Similar tax credit programs in other states  .  It appears  
               that this bill is patterned after the Public Education Tax  
               Credit Act, model legislation developed by the Cato  
               Institute's Center for Educational Reform.  (Id.).  This  
               bill is also similar to the School Tax Credit enacted in  
               Arizona in 1997 that created a $500 tax credit for  
               contributions made by individuals (corporate taxpayers are  
               not eligible) to School Tuition Organizations, third party  
               organizations that fund private and sectarian school  
               scholarships.  Those scholarship organizations are required  
               to spend at least 90% of the contributions on tuition  
               grants, but could use the remaining 10% on administrative  
               costs, marketing, advertising, or fee related to  
               incorporating itself as a nonprofit organization.  The  
               funds are not regulated and the organizations are not  
               required to immediately use those funds for scholarship  
               grants.  It has been reported that, in 2007, donations to  
               private scholarship organizations in Arizona totaled a  
               little over $54 million, with the average scholarship  
               granted of $1,788. (Arizona Department of Revenue).   
               According to a study released by the Friedman Foundation  
               for Educational Options, a national group based in  
               Indianapolis, Arizona's tax credit program has saved the  
               state nearly $18 million since its inception.  However, the  
               critics of that program state that approximately 76 cents  
               of every dollar of the grants awarded through the program  
               have gone to families whose children already attended  
               private school and that the program most benefits schools  
               in wealthiest schools and wealthier families.  (The Truth  
               About Arizona's Tuition Tax Credits, Arizona Education  
               Association).  Furthermore, the Arizona Republic's  
               investigative report revealed in 2000 that, although the  
               law prevented parents from earmarking the contribution for  
               their own children, individuals were earmarking tuition  
               contributions for friends' or relatives' children and  








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               having the favor reciprocated. 

             Florida and Pennsylvania have corporate tax credit  
               scholarship programs allowing corporations to receive a tax  
               credit for donations made to scholarship organizations.   
               Also Georgia and Iowa have created donation tax credit  
               programs to allow individuals to receive a credit for their  
               donations to scholarship organizations. 

              c)   Potential constitutional challenge  .  This bill may be  
               subject to constitutional challenge for indirectly  
               channeling potential state revenues to private educational  
               institutions.  The California Constitution prohibits the  
               state to use public funds to support religious schools or  
               schools that are not under the exclusive control of the  
               officers of the public schools. (California Constitution,  
               Article XI, Section 8, and Article XVI, Section 5).  AB 279  
               creates a subsidy program for private schools and raises  
               questions about the use of public funds to support private,  
               sectarian institutions.  Nationally, 81% of private-school  
               students attend schools that are religious.  AB 279 does  
               not prevent but encourages the use of public funds for  
               religious activities and education.  Recently, on March 1,  
               2009, the 9th U.S. Circuit Court of Appeals heard a  
               three-year-old challenge to Arizona's individual credit  
               scholarship program (Winn v. Garriott, Case Number  
               05-15754).  The American Civil Liberties Union is  
               challenging the program's constitutionality, claiming that  
               it violates the federal Establishment Clause.  The  
               Committee may wish to delay the consideration of this bill  
               until the 9th U.S. Circuit Court of Appeals renders its  
               decision. 

              d)   "Double dipping"?   Existing law already provides a tax  
               incentive, in the form of a deduction, for charitable  
               contributions.  This bill would allow a qualified taxpayer  
               a double benefit:  First, a deduction and, then, a credit  
               for the  same  charitable contribution.  Generally, a credit  
               is allowed in lieu of a deduction in order to eliminate  
               multiple tax benefits for the same item or expense.  The  
               Committee staff suggests that this bill be amended to deny  
               a deduction for the charitable contribution for which the  
               credit is claimed. 

              e)   Costs versus Benefits.   The tuition tax credit program  








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               proposed by this bill would provide scholarships to certain  
               students and their parents to pay for their "dream" school.  
                By providing scholarships to students from various  
               backgrounds, the program will, potentially, increase  
               diversity in private schools.  And, by moving some students  
               out of public schools, this program would, arguably,  
               eliminate the per-pupil expenditure for those students and  
               would foster competition between public and private  
               schools.  However, all of those benefits are estimated to  
               come at a great price to the state.  Specifically:  

               i)     A 1999 study of Cleveland's voucher program showed  
                 that the public schools from which students left for  
                 private voucher schools were unable to reduce  
                 administrative costs or eliminate teaching positions.   
                 Even though the public school district was unable to cut  
                 overall operating, it lost its state funding. (KPMG, LLP,  
                 Cleveland Scholarship and Tutoring Program: Final  
                 Management Study (Sept. 1999).  

               ii)    Similar education tax credit programs implemented in  
                 other states demonstrate that, often, those programs do  
                 not serve primarily low-income students and, generally,  
                 tax credits benefit middle- and upper-income families  
                 disproportionately because they are more likely to have  
                 income to make a donation and enough tax liability to  
                 utilize the tax credit.  This bill establishes an income  
                 threshold for a student to qualify as an "eligible  
                 student" at two and a half times the income standard used  
                 to qualify for a free or reduced lunch price.  To qualify  
                 for a free meal, a student's family's income must be at  
                 or below 130% of the poverty level, which currently is  
                 $27,560 for a family of four. To qualify for a reduced  
                 lunch price, a student's household income may not exceed  
                 185% of the poverty level, which currently is $39,200.   
                                                                      According to the FTB's calculations, those numbers  
                 translate into $68,000 and $98,000 of income that would  
                 qualify students for scholarships under this bill.  

               iii)   Giving tax credits to unrelated individuals and  
                 businesses have the unintended consequence of making  
                 private schools depend on scholarship-granting entities,  
                 rather than parents, for funding.  For example, the New  
                 Jersey plan would replace $2 out of every $3 of private  
                 school tuition with foundation scholarships.  The  








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                 scholarship-granting entities will have to compete for a  
                 finite amount of contributions from philanthropists, and  
                 then decide which schools they would support.  Whose  
                 interest are those organizations going to serve - the  
                 interests of parents and students or those of the  
                 contributors and schools they help to finance?  The  
                 proposed tax credit gives parents no additional authority  
                 over how schools allocate their spending but,  
                 potentially, subjects them to the dictates of scholarship  
                 organizations. 

              f)   Federal tax incentives for K-12 education  .  Federal tax  
               law allows parents to create tax-free education savings  
               accounts by investing up to $2,000 annually.  The funds  
               from those accounts may be used tax-free for K-12 or  
               college expenses.  In addition, a provision in President  
               Bush's "No Child Left Behind" law allowed parents of  
               children in failing schools to use their entire share of  
               Title I aid - approximately $500 to $1,000 per child - to  
               purchase private tutoring services to help boost their  
               achievement.  (Making Education Tax Credits Work at the  
               Federal Level, Don Soifer, Remarks to the National  
               Conference of State Legislatures Assembly on Federal  
               Issues, May 10, 2002).  

              g)   Sunset date  .  This bill lacks a sunset date to allow  
               periodic legislative review of this tax expenditure.  The  
               Committee staff recommends an amendment to add a sunset  
               date. 

              h)   Implementation concerns  .  The FTB has identified the  
               following implementation concerns:

               i)     While this bill would disallow the credit for  
                 noncompliance by the scholarship granting organization or  
                 qualified school, it fails to specify who would measure  
                 and record the level of compliance.  It is also unclear  
                 how the department or taxpayer would be notified on the  
                 noncompliance after receipt of the contribution has been  
                 provided.  Since the FTB lacks expertise in this area,  
                 the FTB staff recommends that another agency that  
                 possesses relevant expertise be designated as a  
                 certifying agency.  

               ii)    This bill would allow a qualified taxpayer to divert  








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                 a prorated share of his/her state income tax withholdings  
                 to a scholarship granting organization.  Because the FTB  
                 does not administer income tax withholding, the FTB staff  
                 suggests that this bill be amended to authorize the  
                 Employment Development Department to administer this  
                 provision. 

               iii)   This bill requires the scholarship entity to file  
                 financial information to demonstrate "financial  
                 viability" to the FTB.  It is unclear what kind of  
                 guidelines the FTB should use in its evaluation of the  
                 entity's financial viability.  

               iv)    The Personal Income Tax (PIT) Law and Corporation  
                 Tax (CT) Law provisions of this bill are inconsistent in  
                 that there are several terms used and defined in the PIT  
                 section of this bill that are inapplicable in the CT  
                 section.  Inconsistent terms and definitions could lead  
                 to disputes with taxpayers and would complicate the  
                 administration of this credit.  

               v)     This bill requires the taxpayer to submit a copy of  
                 the contribution receipt when claiming the credit.   
                 Generally, FTB requires taxpayers to provide  
                 certification  upon request  to eliminate additional  
                 processing.  The FTB staff recommends that this bill be  
                 amended to require a taxpayer to submit the contribution  
                 receipt only if requested by the FTB.  
                
                vi)    The FTB staff also recommended amendments to correct  
                 technical errors.  A copy of the suggested amendments is  
                 attached to this analysis. 

           6)Similar Legislation  .

          AB 2605 (Nakanishi), introduced in the 2007-08 Legislative  
            Session, would have allowed a personal income tax credit to  
            qualified taxpayers for each dependent attending a nonpublic  
            school.  AB 2605 was held under submission in this Committee. 

          AB 2561 (Niello), introduced in the 2007-08 Legislative Session,  
            would have provided an income tax credit for costs paid or  
            incurred for private school tuition.  AB 2561 was held under  
            submission in this Committee. 









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          SB 1768 (Hollingsworth), introduced in the 2005-06 Legislative  
            Session, would have provided an income tax credit for  
            contributions made to a school tuition organization or a  
            public school.  SB 1768 died in the Senate Revenue and  
            Taxation Committee. 




           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          The California Catholic Conference 
          Union of Orthodox Jewish Congregations of America
          Capitol Resource Family Impact

           Opposition 
           
          The Small School Districts' Association
          Americans United for Separation of Church and State
          California Tax Reform Association
          California Federation of Teachers, AFT, AFL-CIO
          California Professional Firefighters
          California School Employees Association
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)  
          319-2098