BILL ANALYSIS Ó
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