BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2326
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          Date of Hearing:  April 21, 2014


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

               AB 2326 (Dickinson) - As Introduced:  February 21, 2014


          Majority vote.  Fiscal committee.  
           
          SUBJECT  :  Personal income tax:  deductions:  pet adoption costs:  
           voluntary contributions

           SUMMARY  :  Allows a deduction for qualified costs paid or  
          incurred adopting a pet from a qualified animal rescue  
          organization, and authorizes the addition of the Pet Adoption  
          Cost Deduction Fund (Fund) checkoff to the personal income tax  
          (PIT) return upon the removal of another voluntary contribution  
          fund (VCF) from the return. Specifically,  this bill  :  

          1)Allows, for taxable years beginning on or after January 1,  
            2015, and before January 1, 2020, a PIT deduction equal to the  
            "qualified costs" paid or incurred by a taxpayer for the  
            adoption of a "pet" from a "qualified animal rescue  
            organization".  

          2)Defines "qualified costs" as amounts paid to a "qualified  
            animal rescue organization" to adopt a "pet", not to exceed  
            $100.  

          3)Defines a "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.  

          4)Defines a "qualified animal rescue organization" as a public  
            animal control agency or shelter, humane society shelter, or  
            "rescue group", as defined.  

          5)Limits the deduction allowed for a taxable year to $100.  

          6)Repeals the statutory provisions authorizing the deduction on  
            December 1, 2020.    

          7)Establishes the Fund in the State Treasury.  








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          8)Provides that all money transferred to the Fund, upon  
            appropriation by the Legislature, shall be allocated to the:

             a)   Franchise Tax Board (FTB) and the State Controller for  
               reimbursement of all costs incurred in administering the  
               VCF; 

             b)   State Controller for reimbursement of all losses  
               incurred by the General Fund (GF) in connection with this  
               bill's deduction for pet adoptions; and, 

             c)   Department of Food and Agriculture (DFA) for grant  
               distribution to "eligible municipal shelters" for the  
               purpose of providing food and shelter to abandoned and  
               impounded animals.  

          9)Allows the DFA to use up to 5% of the money allocated to  
            municipal shelters for administrative costs.  

          10)Defines an "eligible municipal shelter" as a city or county  
            animal control agency or shelter that is current on its  
            reporting requirements to the State Department of Public  
            Health (DPH), Veterinary Public Health Section.  

          11)Requires the DPH, upon written request of the DFA, to make  
            available information regarding whether a city or county  
            animal control agency or shelter is current on its reporting  
            requirements.  

          12)Requires the DFA to process all grant applications on a  
            first-come-first-served basis, in the following manner:  

             a)   Eligible municipal shelters processing fewer than 5,000  
               dogs and cats each year shall receive up to $7,500, if  
               funds are available; 

             b)   Eligible municipal shelters processing between 5,000 and  
               25,000 dogs and cats each year shall receive up to $15,000,  
               if funds are available; and, 

             c)   Eligible municipal shelters processing more than 25,000  
               dogs and cats shall receive up to $22,500, if funds are  
               available.









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          13)Contains standard VCF sunset and minimum contribution  
            provisions.    

           EXISTING LAW  :

          1)Authorizes various deductions in computing income subject to  
            tax under the PIT Law. 

          2)Allows for the deduction of certain expenses to arrive at a  
            taxpayer's adjusted gross income (AGI).  These expenses  
            include certain trade and business expenses, losses from the  
            sale or exchange of certain property, alimony, and moving  
            expenses.  Thus, all taxpayers with these types of expenses  
            receive the benefit of a deduction, regardless of whether the  
            taxpayer itemizes deductions or uses the standard deduction.   
            These deductions are known as "above-the-line" deductions.    

          3)Allows taxpayers to contribute to one or more of 20 VCFs on  
            the 2013 PIT return.

          4)Provides a specific sunset date for each VCF, except for the  
            California Seniors Special Fund and the State Parks Protection  
            Fund.

          5)Requires each VCF to meet an annual minimum contribution  
            amount to remain in effect, except for the California  
            Firefighters' Memorial Fund, the California Peace Officer  
            Memorial Foundation Fund, and the California Seniors Special  
            Fund.

          6)Authorizes the Municipal Shelter Spay-Neuter Fund as a VCF on  
            the PIT return.  Contributions are allocated to the DFA for  
            grant distribution to eligible municipal shelters for the  
            purposes of providing low cost or free spay-neuter services.  

           FISCAL EFFECT  :  The FTB estimates that this bill's deduction  
          provisions would reduce GF revenues by $2.8 million in Fiscal  
          Year (FY) 2015-16, by $3 million in FY 2016-17, and by $3.1  
          million in FY 2017-18.  The FTB estimates that this bill's VCF  
          provisions, in turn, would reduce GF revenues by $10,000  
          annually.  

           COMMENTS  :   

          1)The author has provided the following statement in support of  








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            this bill:

               An estimated 800,000 animals are abandoned in California  
               every year, leaving local governments and nonprofit  
               shelters to care for these animals at a cost of about a  
               quarter of a billion dollars annually. While reducing  
               intake of homeless animals into shelters is the ultimate  
               goal, reducing the time adoptable homeless animals spend in  
               shelters is critically important to ensure that limited and  
               valuable resources are used where they are most needed.

          2)The sponsor of this bill notes the following:

               AB 2326 represents a modest investment that will pay  
               dividends for taxpayers across Califronia.  Specifically,  
               AB 2326 will allow taxpayers who adopt an animal from a  
               qualified rescue organization to take a deduction equal to  
               the qualified costs paid for the adoption, not to exceed  
               $100.

               Communities throughout our state are spending an  
               extraordinary amount of taxpayer dollars to fund reactive  
               programs to impound and shelter animals.  In fact, it is  
               estimated that the cost to every taxpayer in the United  
               States to shelter tray animals is $3 per person - that  
               makes the share for California taxpayers about $120 million  
               annually.

          3)Proponents of this bill note the following:

               While the tax deduction provision that AB 2326 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 2326  
               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.  









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          4)The FTB notes the following implementation concern in its  
            staff analysis of this bill:

               This provision would create a tax deduction for costs  
               related to pet adoption.  As written, the language fails to  
               indicate whether the deduction should be allowed "above the  
               line" or "below-the-line."  To eliminate confusion, the  
               bill should be amended to specify how the deduction should  
               be treated.

            The FTB's staff analysis further notes that an  
            "above-the-line" deduction would be used to derive a  
            taxpayer's AGI, while a "below-the-line" deduction would  
            reduce California AGI to derive taxable income.   

          5)Committee Staff Comments: 

              a)   What is a "tax expenditure" ?  Existing law provides  
               various credits, deductions, exclusions, and exemptions for  
               particular taxpayer groups.  In the late 1960s, U.S.  
               Treasury officials began arguing that these features of the  
               tax law should be referred to as "expenditures" since they  
               are generally enacted to accomplish some governmental  
               purpose and there is a determinable cost associated with  
               each (in the form of foregone revenues).  This bill enacts  
               a new tax expenditure program, in the form of a PIT  
               deduction, to encourage the adoption of pets from qualified  
               animal rescue organizations.  

              b)   How is a tax expenditure different from a direct  
               expenditure  ?  As the Department of Finance notes in its  
               annual Tax Expenditure Report, there are several key  
               differences between tax expenditures and direct  
               expenditures.  First, tax expenditures are reviewed less  
               frequently than direct expenditures once they are put in  
               place.  This can offer taxpayers greater certainty, but it  
               can also result in tax expenditures remaining a part of the  
               tax code without demonstrating any public benefit.  Second,  
               there is generally no control over the amount of revenue  
               losses associated with any given tax expenditure.  Finally,  
               it should also be noted that, once enacted, it takes a  
               two-thirds vote to rescind an existing tax expenditure  
               absent a sunset date.  This effectively results in a  
               "one-way ratchet" whereby tax expenditures can be conferred  
               by majority vote, but cannot be rescinded, irrespective of  








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               their efficacy, without a supermajority vote.

              c)   Incentive or reward  ?  Generally, tax expenditures are  
               enacted to encourage socially beneficial behavior that  
               would not take place without a financial incentive.  As  
               noted above, this bill establishes a deduction to encourage  
               the adoption of pets from qualified animal rescue  
               organizations.  It would be difficult to find a person who  
               did not consider this a worthy goal.  At the same time,  
               however, this bill limits the deduction amount to $100 per  
               taxable year.  Applying a marginal tax rate of 9.3%, this  
               would translate to a tax break of less than $10.  The  
               Committee may wish to consider whether such an incentive is  
               likely to encourage people to engage in "new" behavior, or  
               whether it would simply reward people who would have  
               adopted a pet in the absence of a deduction.   
              
              d)   Making things whole  :  This bill additionally authorizes  
               a new VCF, with the goal of reimbursing "all losses  
               incurred" by the GF as a result of the pet adoption  
               deduction.  This raises a host of issues.  As a threshold  
               matter, VCFs are currently used to channel taxpayer  
               contributions to a wide range of worthy causes, ranging  
               from breast cancer research to the preservation of rare and  
               endangered species.  Thus, contributed funds directly  
               support the cause chosen by the taxpayer.  This bill,  
               however, establishes an entirely new precedent by asking  
               taxpayers essentially to "backfill" the GF for losses  
               associated with a deduction claimed by other taxpayers.   
               The Committee may wish to consider whether it wishes to  
               establish such a precedent for tax expenditure measures and  
               how likely such a VCF is to garner significant taxpayer  
               support.  Moreover, it should be noted that the FTB  
               estimates that this bill's deduction would reduce GF  
               revenues by roughly $3 million annually.  The most  
               successful VCF, in turn, raised only $476,933 in 2013.   
               Thus, it is difficult to imagine a VCF completely  
               offsetting the revenue losses associated with this bill's  
               pet adoption deduction.  Nevertheless, this bill clearly  
               envisions excess funds as it establishes a detailed grant  
               process for such funds administered by the DFA.    

              e)   Suggested technical amendments  :

               i)     On page 3, in line 13, delete "as," and insert "as";  








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                 and, 

               ii)    On page 5, in line 15, delete "Fee" and insert  
                 "Cost".        

              f)   Potential conflicts  :  This bill appears to be in  
               conflict with the following measures:

               i)     AB 1651 (Donnelly):  Allows a deduction for a loss  
                 in fair market value of property attributable to a rule  
                 or regulation, as specified.  

               ii)    AB 1786 (Olsen):  Allows a deduction for qualified  
                 amounts paid or incurred for qualified education-related  
                 expenses.

               iii)   AB 1831 (Conway):  Allows a deduction for amounts  
                 paid or incurred by a taxpayer during the taxable year  
                 for medical insurance, as specified.

               iv)    AB 2576 (Harkey):  Allows a deduction in connection  
                 with health savings accounts in conformity with federal  
                 law.

               v)     SB 1035 (Huff):  Allows a deduction in connection  
                 with health savings accounts in conformity with federal  
                 law.                  
                
              g)   Prior legislative efforts  :

               i)     AB 373 (Leach), of 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.

               iii)   AB 233 (Smyth), of the 2009-10 Legislative Session,  
                 would have allowed a deduction for qualified costs paid  
                 or incurred by a taxpayer for the adoption of a pet from  








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                 a qualified animal rescue organization.  AB 233 (Smyth)  
                 was held by the Assembly Committee on Appropriations.      
                   

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
          
          American Society for the Prevention of Cruelty
            of Animals (Sponsor)
          Humane Society of the United States
          Sacramento Society for the Prevention of Cruelty
            of Animals
          San Diego Humane Society and SPCA

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098