BILL ANALYSIS Ó
SB 284
Page 1
Date of Hearing: August 21, 2013
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
SB 284 (de León) - As Amended: August 13, 2013
Policy Committee: Revenue and
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows a credit for three tax years, beginning January
1, 2014, based on the taxpayer's contribution to a newly
established Higher Education Investment Tax Credit Program
Special Fund, as specified. Specifically, this bill:
1)Provides a credit equal to 60% of the amount contributed by
the taxpayer during the 2014 taxable year. Provides a credit
of 55% during the 2015 taxable year and 50% in the 2016
taxable year, as allocated and certified by the California
Educational Facilities Authority (CEF Authority). The program
ends January 1, 2017.
2)Provides that the aggregate amount of credit that may be
allocated and certified shall not exceed $500 million for the
2013 calendar year and $500 million for each calendar year
thereafter.
3)Requires the CEF Authority to develop administrative
procedures, and authorizes the authority to develop
regulations. If the allocation and certification would be
limited or denied because the $500 million annual cap has been
reached, the CEF Authority shall offer to either return the
contribution or provide a certification for the next taxable
year.
4)Provides that in cases where the credit amount exceeds the tax
owed, the excess credit amount may be carried over to reduce
the tax liability in the following year, and the succeeding
five years if necessary, until the credit is exhausted.
Prohibits a deduction for amounts taken into account in
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calculating the credit.
5)Provides that revenue in the Special Fund shall be allocated
as follows:
a) First, to the General Fund (GF) in an amount equal to
the amount of certified credits allowed for the taxable
year.
b) Second, upon appropriation by the Legislature, to FTB,
the CEF Authority, the State Controller and the Student Aid
Commission for reimbursement of all administrative costs
incurred in connection with their duties under this bill,
and Education Code Section 69432.75, and to the Student Aid
Commission for purposes of awarding Cal Grants to students
pursuant to Education Code Section 69432.75.
6)Becomes operative only if SB 285 (de León) of the 2013-14
legislative session is enacted and takes effect on or before
January 1, 2015.
FISCAL EFFECT
1) The State Treasurer's Office (STO) estimates costs of
approximately $400,000 to $500,000 annually to administer
the program. STO costs will vary depending on the number of
taxpayers who apply for the credit.
2) In the first year, if $833 million is donated, the $500
million in available tax credit would be exhausted. After
administrative costs are deducted and the GF is reimbursed,
there would be $300 million available for transfer to the
Student Aid Commission for Cal Grants to students. The
available funds will increase in the two subsequent years as
the amount of donations will have to increase to exhaust the
available credit.
3) To the extent, this bill leads donors to switch their
charitable donations without an increase in overall
charitable giving, there would proportional savings to the
GF from reduced deductions for such donations.
COMMENTS
1)Purpose . According to the author, Senate Bill 284 seeks to
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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. The author explains SB 284's College Access Tax
Credit Fund works by leveraging federal tax deductions for
charitable contributions to the state. The author notes this
tax credit has been fully vetted by a University of California
Los Angeles report, which concludes that the members of the
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.
2)Support . Supporters, including the California State and
University of California Student Association, states since
1969, the Cal Grant program has helped millions of low-income
Californians afford college. They note the Cal Grant B,
awarded primarily for low-income, under-represented students,
provides crucial "access awards" to help these students pay
for non-tuition related expenses such as textbooks,
transportation, and living expenses. Unfortunately, the
purchasing power of the Cal Grant B award has stagnated in
recent years, while college costs have rapidly escalated.
This year's $1,473 award represents just a quarter of the
original Cal Grant B purchasing power, according to
supporters. Increasing the award amount would enable students
to limit the number of hours they work, and enroll in more
credit hours, both of which contribute to greater completion
rates.
3)Contingencies . As noted above, this bill becomes operative
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only if SB 285 (de León) is also enacted. SB 285 would,
beginning with the 2015-16 academic year, establish priorities
for allocation within the Cal Grant program of funds derived
from the HEITC program proposed to be established by SB 284.
4)Income Tax Deductions . Existing federal and state laws allow
individuals to deduct certain expenses, such as medical
expenses, charitable contributions, interest and state and
local taxes. For example, if a taxpayer making $100,000
annually makes a $100 charitable contribution, the taxpayer
could take a deduction on state taxes for the same amount and
reduce taxable income. Assume this taxpayer is subject to
the state tax at the 9.3% rate for the state and a federal
deduction from income tax at a 28% rate. The taxpayer would
receive about $9.30 from the state and about $28 from the
federal government so the total out of pocket expense is
$62.70. The charity has received $100. At higher tax rates,
the deduction is larger.
5)Doing the math. What happens if this bill becomes law?
a) Taxpayer . The taxpayer donates $100 to the state in the
first year and obtains a $60 credit. The taxpayer also
deducts $100 as a charitable contribution on their federal
tax return. Again, assuming a 28% federal tax rate, the
deduction will result in $28 from the federal government; a
deduction on state taxes is precluded in the bill. The
taxpayer has donated $100, received a $60 credit and is
paying $28 less in federal taxes and is only out of pocket
$16, much less than the $60 noted in #4.
b) The State . The charity, in this case the state, has
received a donation of $100. But $60 must be transferred
to the General Fund to reimburse it for the cost of the
credit. The remaining $40 is available for student
financial aid and administrative costs.
c) Federal government . The federal government is still out
$28 as noted in #4. The federal government would bear
increased costs if this bill leads to more overall
charitable donations.
6)New money? The generous tax benefit related to this tax
credit could change charitable giving. It is unclear what
this impact will be, but following are some possibilities.
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a) The attractive credit could lead to significantly
increased giving, as taxpayers increase their overall
charitable giving to take advantage of it.
b) Taxpayers could shift their giving from other charitable
purposes to the state to take advantage of the credit. In
this case, the increased amounts of student aid come at the
expense of other charitable giving and those charities
would be significantly impacted. The state is essentially
offering a bonus to taxpayers to change their pattern of
charitable donations.
c) The pattern of donations does not change. Many
taxpayers may not find the program attractive. If their
intention is to donate $100 for a specific purpose other
than education, the credit does not affect their behavior.
Those that were already donating to similar purposes could
benefit from the tax credit. Because of the cost to the
state of reimbursing the General Fund, overall net
educational donations could decline.
To put this bill's possible impacts into perspective,
Californians claim about $20 billion in deductions for
charitable donations. If you assume that option (a) occurs,
that would mean an additional $800 million in charitable
donations that are itemized, an increase of 4% as Californians
claims about $20 billion in deductions for charitable
donations.
7)Related legislation . SB 285 (de León) is the companion
measure to this bill and lays out direction for the Cal Grant
program. These two bills must become operative together or
neither becomes operative. SB 285 is on this Committee's
Suspense File.
8)There is no registered opposition to this bill .
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081