BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 284 HEARING: 4/24/13
AUTHOR: deLeón FISCAL: Yes
VERSION: 4/17/13 TAX LEVY: Yes
CONSULTANT: Miller
INCOME TAXES: CREDITS: CONTRIBUTIONS TO EDUCATION FUNDS
Establishes a tax credit equal to 60%, 55%, and 50% of
contributions to a special education fund for the purposes
of providing Cal Grants.
Background and Existing Law
Existing state and federal laws provide various tax credits
designed to provide tax relief for taxpayers who incur
certain expenses (child adoption, for example) or to
influence behavior, including business practices and
decisions (research credits or economic development area
hiring credits, for example). These credits are designed
to provide incentives for taxpayers to perform various
actions or activities that they may not otherwise
undertake. Currently, neither federal nor state law
provides a credit for contributions to a special education
fund.
Existing federal and state laws allow individuals to deduct
certain expenses, such as medical expenses, charitable
contributions, interest, and taxes, as itemized deductions.
For example, if a taxpayer making $100,000 annually makes
a $100 contribution to UCLA, he or she would receive a
state deduction for the amount that reduces income subject
to the tax at the 9.3% rate for the state and a federal
deduction of about 35% representing the state and federal
tax rates. Therefore, the taxpayer would receive a $10
benefit from the state and about $30 from the federal
government for a total out of pocket expense of $60, thus
creating a charitable giving incentive for taxpayers.
Current federal and state law allows a corporation and
S-corporation to deduct charitable contributions up to 10%
of its net income. Contributions in excess of 10% may be
carried over to five succeeding taxable years.
SB 284 -- 4/17/13 -- Page 2
A recent Internal Revenue Service (IRS) Chief Counsel Memo
unequivocally states that any contribution to a state
agency is deductible for federal purposes on federal tax
returns.
The California Educational Facilities Authority (CEFA)
within the Treasurer's office mission is to provide
students with better access and broader opportunities in
higher education by providing qualified non-profit higher
education institutions with the assistance needed to reduce
their capital costs of financing academic related
facilities through a tax-exempt revenue bond program.
Cal Grant B* High School Entitlement Program provides funds
to eligible low-income high school graduates who have at
least a 2.0 GPA on a four-point scale and apply within one
year of graduation. The award provides up to $1,551 for
books and living expenses for the first year and each year
following for up to four years (or equivalent of four
full-time years). After the first year, the award also
provides tuition fee funding at qualifying postsecondary
institutions.
Proposed Law
Senate Bill 284, for taxable years beginning on or after
January 1, 2014, and before January 1, 2017, allows
taxpayers, upon receipt of the California Educational
Facilities Authority within the Treasurer's office's
(Authority) certification, to receive an income or
franchise tax credit for a specified percentage of cash
contributions made to the College Access Tax Credit Fund
(Fund). Unused credits may be used for six subsequent
years.
The maximum aggregate amount of credit that could be
allocated and certified by the Authority for any calendar
year would be $500 million.
The specified percentage used to calculate the credit would
be:
60 percent of the amount contributed during the 2014
taxable year
55 percent of the amount contributed during the 2015
taxable year
SB 284 -- 4/17/13 -- Page 3
50 percent of the amount contributed during the 2016
taxable year
The Authority would be required to do all of the following:
Allocate and certify the income tax credit to
personal and corporate taxpayers from January 1, 2014
to December 31, 2016.
Establish a procedure for taxpayers to contribute
to the fund and obtain certification for the credit.
Provide to the Franchise Tax Board (FTB) a copy of
each credit certificate issued by March 1st of the
calendar year immediately following the year of issue.
The bill would preclude any deductions for amounts
taken into account in the calculation of the credit.
The credit would be repealed by its own terms as of
December 1, 2017.
Amounts contributed to the fund would, upon appropriation
by the Legislature, be allocated to the Student Aid
Commission for the purpose of awarding Cal Grants. The
funds would be used for CalGrant B programs if SB 285
passes (see comment 7). This bill is contingent upon the
passage of SB 285.
SB 284 would take effect immediately as a tax levy.
State Revenue Impact
The FTB estimates that the credit will result in a revenue
loss of $190 million in 2014-15; $360 million in 2015-16
and $330 million in 2017-18.
FTB also estimates the potential "net gain" from the
proceeds but does not consider administrative costs. Any
net gain, after the costs are subtracted, would be applied
to CalGrants.
Estimate in Millions
-----------------------------------------------
| |2014-15|2015-16|2017-18|
| | | | |
SB 284 -- 4/17/13 -- Page 4
|-----------------------+-------+-------+-------|
| Revenue raised by | $750 | $700 | $600 |
| donations | | | |
|-----------------------+-------+-------+-------|
| Credit Cost to the | -$190 | -$360 | -$330 |
| General Fund | | | |
|-----------------------+-------+-------+-------|
| Net Gain/Cal Grants | $560 | $340 |$270 |
-----------------------------------------------
Comments
1. Purpose of the bill . According to the author, "Senate
Bill 284 seeks to increase Cal Grant B Access Award amounts
for California's lowest income students to improve academic
achievement and graduation rates through $500 Million in
available tax credits in the College Access Tax Credit Fund
by leveraging federal tax deductions for charitable
contributions. This tax credit has been fully vetted by a
University of California Los Angeles report which concludes
that the members of legislature are custodians of
California's welfare, particularly in an era of state
budgetary distress and should take advantage of Internal
Revenue Service (IRS) rules and regulations to benefit the
state. This tax credit differs from most others in that
the state does not lose money to incentivize a behavior.
Rather, the taxpayer makes a donation to the state and then
a credit is given. For every dollar donated to the Fund in
the first year, the individual taxpayer or the corporate
donor would receive 60-cents back from the state and the
Fund would receive 40-cents plus interest. The Franchise
Tax Board (FTB) predicts that the College Access Tax Credit
Fund would be fully subscribed due to the high incentive to
taxpayers because according to IRS rules the taxpayer would
also be able to take a donation deduction on their Federal
Taxes. The taxpayer would get back on every dollar donated
a total of 80 cents to over 95 cents depending on how they
file.
California is a so-called donor state, only receiving
around 78-cents for every dollar state taxpayers send to
Washington. It's time to leverage Federal dollars to help
offset skyrocketing college tuition. For each of the three
years of the program, the California Student Aid Commission
(CSAC) would have on average an extra $300 Million, after
SB 284 -- 4/17/13 -- Page 5
the tax credits are paid to taxpayers, and after all
administrative costs are paid for, to increase the
under-funded Cal Grant B Access Awards for over 170,000
California students at our for profit and not-for-profit
private institutions, and all three sectors of our public
institutions. College graduates are a critical part of the
engine that drives California's economy. They are the
future innovators, educators, engineers, lawyers,
scientists, doctors, architects, executives, and so on that
help make California the 9th largest economy in the world.
The taxpayers of California make a tremendous investment in
its college graduates. There is not a single public
college or university student, whether they are on direct
financial aid or not, who doesn't have their education at
least partially underwritten by the taxpayers of
California. We must make sure that we are getting maximum
benefit from that investment.
When the Cal Grant B Access Award was first established in
1969, the amount granted per student for the year was $960
to pay for books, housing and transportation. 43 years
later that amount has grown to only $1,473 for the year -
not even close to keeping up with inflation-that figure
should be $5,900. What results is that many students must
work one or even two jobs to help pay the bills, which
delays graduation and impacts the students' ability to
maximize their learning experience. This not only
shortchanges the students but it shortchanges the
California taxpayers, who are investing in their education
for much longer than the four years it should take students
to complete their degree and start contributing to the
economy as graduates."
2. Redirection or new money ? This bill encourages giving
to the state's Cal Grant program through a 60%, 55% and 50%
credit against contributions, the most generous tax credit
the state has ever allowed. Such a credit is sure to
entice taxpayers to contribute but the credit may be so
great that it redirects contributions from charities that
currently receive them to this program. Instead of making
a donation to UCLA, for example, a taxpayer may choose to
use this tax credit instead therefore creating a greater
need for a public university which is at partially funded
by the general fund. Will this result in new revenue or
simply redirect charitable funds from some charities to
SB 284 -- 4/17/13 -- Page 6
CalGrants?
3. The right level . SB 284 seeks to take full advantage
of federal law while funding the Cal Grant program in the
state. In order to ensure that there is more new money
contributed to this fund than a simple redirection, the
Committee may wish to consider reducing the amount of the
credit to 50%. At a lower amount, the taxpayer has more
"skin in the game" and is giving real money to the
education fund, not simply breaking even, or almost even.
Of course, taxpayers contribute for a variety of reasons
including building naming rights or to honor a family
member; those taxpayers would not redirect contributions.
However, this credit may provide a tax planning
opportunity, for both corporations and individuals,
especially if there is little out of pocket expense. The
following chart provides a simple example of a $100
contribution from a simple wage earning taxpayer with
adjusted gross income of $100,000 annually subject to the
alternative minimum tax (AMT, see comment 4) with a 30%
federal tax rate with a 65% credit and a 50% credit.
-----------------------------------------------------------
|Credit amount |State tax |Federal |Total Out of |
| |Credit |Deduction |Pocket |
|--------------+-------------+---------------+--------------|
|60% |$60 |$30 |$10 |
|--------------+-------------+---------------+--------------|
|50% |$50 |$30 |$20 |
| | | | |
-----------------------------------------------------------
Professor Stark and Phillip Blackman argue that the state
should consider an even higher credit-72% and make it
transferable to other taxpayers so that there would be zero
out of pocket expenses for the taxpayer.
4. The research is in . Phillip Blackman (associate
director of development at the Penn State Dickinson School
of Law) and Kirk Stark (Professor and Vice Dean at the UCLA
School of Law), who will be at the hearing, wrote a report
"Capturing Federal Dollars with State Charitable Tax
Credits" where they outline the extensive benefits of this
type of credit, with very little cost to the state. They
use their research to show a significant benefit to an AMT
taxpayer; specifically,
SB 284 -- 4/17/13 -- Page 7
An AMT taxpayer making a $100,000 donation to the
CATCF
special fund has a net out-of-pocket cost of only
$12,000-that is, $100,000 minus $28,000 (in federal
tax savings) minus $60,000 (in state tax savings).
Clearly, the tax savings for that type of donation are
far more than the tax savings normally arising from
charitable gifts. AMT payers willing to make a gross
gift of $1 to Cal Grants will be reimbursed a total of
$0.88, consisting of $0.60 from the state of
California and $0.28 from the federal governments. As
structured, S.B. 284 is a powerful ''matching grant''
program that if enacted is likely to generate
significant new funds for the Cal Grants program.
Indeed, the matching rates are so generous that it is
also likely to draw charitable dollars away from other
worthy causes. Even so, it is worth noting that the
program could be made even more attractive to
potential donors. The most obvious way to do that
would be to increase the credit percentage. Any credit
percentage greater than 72 percent would ensure that
donors experience no out-of-pocket costs for their
donations. In states with charitable tax credit
programs already in place, tax planners are beginning
to catch on. One website describing Arizona's tax
credit for school tuition organizations notes that if
you are subject to the AMT, the tax benefits received
exceed the out-of-pocket cost.
The report considers that this "may be too good to be
true," but for the recent IRS ruling, and considers this
tax credit a way to increase federal funds that does not
rely on Congressional actions.
Mr. Blackman and Professor Stark go even farther,
suggesting that the credit would be more lucrative if it
were transferable or allowed against sales taxes. These
changes would create a significant precedent in tax law
that could create unintended consequences.
5. Something for nothing . The bill, as proposed to be
amended in committee, would not have a fiscal effect on the
state as the general fund will be the first fund repaid
from tax proceeds, followed by administrative costs,
followed by the taxpayer's credit, followed by CalGrants.
SB 284 -- 4/17/13 -- Page 8
Given the clear priority order, may there be less funds for
CalGrants depending on the costs associated with the
administration of the program? As administrative costs
become clearer, the author may want to consider capping
these funds while keeping the general fund whole in every
way.
6. Could there be too much ? The bill also doesn't provide
a limit to the creditable amount. For example, five large
taxpayers could contribute $100 million each thereby
discouraging other taxpayers to contribute. The Committee
may wish to consider a mechanism that would allow for
allocations of subsequent year's $500 million caps to allow
for enthusiastic taxpayers to be able to participate.
Last year, in SB 1356, the Senate Appropriations committee
reduced the aggregate amount from $500 million to $100
million. The author will take amendments in committee to
ensure that there is no cost to the general fund either for
the credit or administrative costs; reducing the amount
therefore may not be necessary.
7. First come, first served . SB 284 provides this credit
until total credits allocated reach $500 million at which
point no further credits may be allocated. This process
will create taxpayer confusion and not allow taxpayers to
plan well. For example, if I make a contribution to the
fund today, I will not know until 2015 whether there was
enough money for me to claim the credit. A "certified
credit" by which the Treasurer notifies taxpayers that the
cap will be reached at the end of the calendar quarter will
create a clearer and timely credit for taxpayers. Under
this scenario, the taxpayer would contribute funds to the
program and the Authority, for example, would certify
immediately that funds existed to allocate the credit. If
a taxpayer contributed to the fund and there were no more
funds available, the taxpayer should be able to have the
money returned. When the $500 million annual cap is
reached, no further credits would be certified. When a
similar bill, SB 1356 passed out of this committee last
year, the author amended the bill with this notification.
The April 17th amendments of SB 284, removed the
notification at the request of the Treasurer's office. The
Committee may wish to consider amending the bill to create
a certified credit program that works for the Treasurer's
office in order to create greater efficiencies for
SB 284 -- 4/17/13 -- Page 9
taxpayers.
8. The program . SB 285(deLeón) is the companion measure
to this bill and lays out the programmatic expenditures
within the Cal Grant program. These two bills must become
operative together or neither bill becomes operative. SB
285 passed out of the Senate Education Committee on April
17th.
9. Amendments . The author will take amendments in
committee to:
1. Ensure that the general fund is repaid before any
other payment is made as follows:
(d)(1) The Higher Education Investment Tax Credit
Program Special Fund is hereby created as a special
fund in the State Treasury. All revenue in this
special fund shall be allocated as follows:
(A)First, to the General Fund in an amount equal to
the amount of certified credits allowed pursuant to
this section and Section 23686 for the taxable year.
(B) Second, revenues shall be allocated, upon
appropriation by the Legislature:
(i) To the Franchise Tax Board, the California
Educational Facilities Authority, the Controller, and
the Student Aid Commission for reimbursement of all
administrative costs incurred by these agencies in
connection with their duties under this section,
Section 23686, and Section 69432.75 of the Education
Code.
(ii) To the Student Aid Commission for purposes of
awarding Cal Grants to students pursuant to Section
69432.75 of the Education Code.
2. Cite the appropriate code section for CalGrants:
6943.17 of the Education Code.
Support and Opposition (4/18/13)
Support : American Federation of State, County and
Municipal Employees (AFSCME); Association of Independent
California Colleges and Universities (AICCU); Associated
Students of UC Davis; California Catholic Conference; The
Campaign for College Opportunity; California State Student
SB 284 -- 4/17/13 -- Page 10
Association ; ; California Community College Association of
Student Trustees ; California Competes; The Institute for
College Access and Success ; Public Advocates; Student
Senate for California Community Colleges ; Young
Invincibles
Opposition : None received.