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