BILL ANALYSIS Ó
AB 2434
Page 1
Date of Hearing: May 5, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2434 (Gomez) - As Introduced: February 21, 2014
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: exclusion
SUMMARY : Provides a gross income exclusion for amounts received
as a rebate, voucher, or other financial incentive issued by a
local water or energy agency or supplier for expenses incurred
to participate in a water or energy conservation program.
Specifically, this bill :
1)Provides an exclusion under both the Personal Income Tax (PIT)
Law and the Corporation Tax (CT) Law.
2)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW :
1)Defines "gross income" as, except as otherwise provided, all
income from whatever source derived. (Internal Revenue Code
(IRC) Section 61.)
2)Excludes from gross income the value of any subsidy provided
(directly or indirectly) by a public utility to a customer for
the purchase or installation of any energy conservation
measure, as defined. (IRC Section 136.)
EXISTING STATE LAW :
1)Provides that IRC Section 61, relating to the definition of
gross income, shall apply, except as specified. (Revenue and
Taxation Code (R&TC) Section 17071.)
2)Provides an exclusion, under the PIT Law, for any amount
received as a rebate or voucher from a local water or energy
agency or supplier for any expenses the taxpayer paid or
incurred to purchase or install a:
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a) Water conservation water closet that meets specified
performance standards;
b) Water and energy efficient clothes washer that meets
specified criteria; and,
c) Plumbing device necessary to serve certain recycled
water uses. (R&TC Section 17138.)
3)Provides an exclusion, under both the PIT Law and the CT Law,
for any rebate, voucher, or other financial incentive issued
by the California Energy Commission, the Public Utility
Commission, or a local publicly owned electric utility, for an
expense incurred by a taxpayer to purchase or install a:
a) Thermal system as defined in Public Resources Code (PRC)
Section 25600;
b) Solar system as defined in PRC Section 25600;
c) Wind energy system device that produces electricity; or,
d) Fuel cell generating system that produces electricity.
(R&TC Sections 17138.1 and 24308.1.)
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill would reduce General Fund revenues by $3 million in
fiscal year (FY) 2014-15, by $2 million in FY 2015-16, and by $2
million in FY 2016-17.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Many local governments, power and water agencies have been
offering payments for conservation programs and equipment.
These approaches have grown in both scope and in
methodology from traditional equipment switch outs to turf
removal and more.
Over the years, the [L]egislature has recognized the
importance of these incentive programs and has protected
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many conservation financial incentives from taxation - but
it appears not all may be protected.
Under current law, the "Personal Income Tax Law" provides
an exclusion from gross income for any amount received as a
rebate from a local water agency or supplier for the
purchase of a water conservation water closet, energy
efficient clothes washers, and plumbing devices.
The "Corporation Tax Law" provides an exclusion from gross
income for any rebate, voucher, or other financial
incentive issued by the California Energy Commission, the
Public Utility Commission, or a local publicly owned
electric utility for any expense incurred by a taxpayer for
the purchase or installation of a thermal system, solar
system, wind energy device that produces electricity, or a
fuel cell generating system.
Through conversations with appropriate committee staff and
the Franchise Tax Board, it was determined that the answer
as to whether these incentives are taxable was unclear and
depended entirely on the interpretation of federal law, to
which California conforms. Unfortunately, despite repeated
requests, the IRS has not issued any guidance on the
subject.
[AB 2434] will provide much-needed clarity and will protect
taxpayers from potential exposure.
2)Proponents of this bill note the following:
Although many local water and energy agencies offer [?]
incentives for participation in environmental conservation
programs, the money that individuals and companies receive
from such agencies is not excluded from gross income and is
thus potentially taxable. These programs help stimulate
local economies and have a profound collective impact upon
environmental and energy sustainability. If individuals
and companies are subject to taxation for rebates,
vouchers, or other incentives through participation in any
of these programs, then they will have no impetus to
participate.
3)The FTB notes the following implementation and technical
concerns in its staff analysis of this bill:
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a) Implementation considerations : "This bill uses phrases
and terms that are undefined, i.e., 'local water', 'energy
agency', 'supplier', 'expenses to participate', and 'water
or energy conservation program'. The absence of
definitions to clarify these phrases and terms could lead
to disputes with taxpayers and would complicate the
administration of this exclusion."
b) Technical considerations : "Page 2, line 5, and page 2,
line 11, replace 'incurred' with 'paid or incurred' to
specify that the expenses would apply to costs that are
either paid or incurred, thus providing for both cash-basis
and accrual-basis accounting methods."
4)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, in the form of an income tax
exclusion, to encourage participation in local water or
energy conservation programs.
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 economic
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,
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irrespective of their efficacy, without a supermajority
vote.
c) Existing law : Existing federal and state law excludes
from gross income any subsidy provided by a public utility
for the purchase or installation of any "energy
conservation measure". An "energy conservation measure",
in turn, is defined as any installation or modification
primarily designed to reduce the consumption of electricity
or natural gas or to improve the management of energy
demand in a dwelling unit, as specified.
Existing state law also provides that amounts received as a
rebate from a local water or energy agency or supplier for
expenses incurred to purchase or install a water
conservation water closet, water and energy efficient
clothes washer, or a specified plumbing device are treated
as a refund or price adjustment of amounts payable to that
agency or supplier.
Finally, existing state law provides an exclusion for any
rebate, voucher, or other financial incentive issued by the
California Energy Commission, the Public Utility
Commission, or a local publicly owned electric utility, for
an expense incurred by a taxpayer to purchase or install a
specified thermal system, solar system, wind energy system,
or a fuel cell generating system.
d) What are we covering ? In recent years, a number of
local governments and agencies have established rebate
programs to encourage conservation. For example, in an
effort to reduce water consumption, the Metropolitan Water
District of Southern California offers a rebate based on
each square foot of water-intensive turf removed. The City
of Sacramento, in turn, recently launched a "cash for
grass" program that will provide rebates to homeowners who
replace their lawns with drought-tolerant landscaping. The
popularity of such programs is only expected to increase as
California continues to grapple with one of the worst
droughts in its recorded history.
As is often the case, however, where good intentions and
tax law collide, ambiguity is the inevitable result.
Specifically, questions have arisen regarding whether such
rebate payments are legally included in a recipient's gross
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income and are, thus, considered taxable. While existing
law specifically excludes specific rebates from gross
income (e.g, those provided for installing a specified
thermal or solar system), it does not appear to include
many other rebate programs, including the turf-removal
rebate programs noted above. Thus, the author has
introduced this bill to provide a greater degree of clarity
and consistency.
Specifically, this bill would exclude any rebate or voucher
issued by a local water or energy agency or supplier for
expenses incurred to participate in a water or energy
conservation program. Obviously, this rather broad
exclusion would cover many things beyond turf removal
rebate programs. As such, it would grant local water and
energy agencies (and suppliers) a high degree of
flexibility in designing incentive programs without the
risk of triggering a tax liability of the part of their
customers. At the same time, however, the very breadth of
the exclusion raises some definitional concerns alluded to
by the FTB in its staff analysis. For example, what
exactly would fall within a "water or energy conservation
program"? In addition, what does it mean to say that a
taxpayer incurs certain expenses to participate in a rebate
program? While a taxpayer would clearly incur expenses
replacing turf with drought-resistant plants, would this
exclusion also include rebates where no expense is incurred
(e.g., for simple energy or water conservation)? Moreover,
should any limitations be provided on the amount a taxpayer
may exclude in a taxable year? The author and Committee
may wish to consider whether additional definitional
clarify would be useful in these regards.
e) Absence of a sunset date : In its current form, this
bill's proposed tax expenditures lack automatic sunset
provisions. This Committee has a longstanding policy
favoring the inclusion of sunset dates to allow the
Legislature periodically to review the efficacy and cost of
such programs. The author may wish to consider the
addition of appropriate sunset provisions.
f) Prior legislation : AB 1968 (Nation), Chapter 843,
Statutes of 2002, provided an exclusion for specified
rebates and vouchers issued for expenses paid or incurred
by a taxpayer to purchase or install a thermal system,
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solar system, wind energy system, or a fuel cell generating
system.
REGISTERED SUPPORT / OPPOSITION :
Support
California Pool & Spa Association
California Special Districts Association
Metropolitan Water District of Southern California
Sonoma County Water Agency
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098