BILL ANALYSIS Ó SB 798 Page 1 Date of Hearing: August 6, 2014 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair SB 798 (De León) - As Amended: January 6, 2014 Policy Committee: Revenue & Taxation Vote: 9-0 Urgency: Yes State Mandated Local Program: No Reimbursable: No SUMMARY This bill creates the College Access Tax Credit Fund (Fund) for purposes of attracting private contributions to fund additional Cal Grants to students, and allows an income tax credit equal to 60%, 55%, and 50% of the amount contributed by an individual or corporate taxpayer to the Fund in each of the taxable years beginning on January 1, 2014, 2015, and 2016, respectively. In summary, this bill: 1)Requires the California Educational Facilities Authority (CEFA) to administer the Fund, and requires that moneys distributed from the Fund be used: a) To reimburse the General Fund for the aggregate amount of certified credits allowed, and specifies that such reimbursements are to be considered GF revenues (for purposes of preserving Proposition 98 funding). b) Upon appropriation, to the CEFA, the Student Aid Commission (SAC), and Franchise Tax Board (FTB) to reimburse administrative costs associated with the program. c) Upon appropriation, to the SAC for purposes of awarding Cal Grants. 2)Requires the CEFA to establish contribution and certification procedures and regulations, allocate tax credits and certify contribution amounts to taxpayers within 45 days of contribution, and provide FTB a copy of each credit certificate issued by March 1 following the year in which the certificates were issued. SB 798 Page 2 3)Limits the aggregate amount of credits that may be allowed to $500 million per calendar year, plus any previously unallocated and uncertified credits; requires contributions to be made in cash; allows the taxpayer to carry forward any unused credit for up to five years. 4)Specifies that the bill takes effect immediately as an urgency statute, becomes operative only if SB 174 (De León) is enacted and takes effect on or before January 1, 2015, and sunsets the credit provisions on December 1, 2017. FISCAL EFFECT 1)Administrative costs to CEFA in the range of $900,000 to $1.6 million over three years to administer the certification of tax credits for contributions, reimbursable from Fund proceeds; minor and absorbable costs to FTB and SAC. 2)Estimated GF revenue decreases of $470 million, $310 million, and $160 million in FY 2014-15, FY 2015-16, and FY 2016-17, respectively, though this bill seeks to reimburse the GF for those amounts. 3)Potential additional contribution receipts of up to $500 million per year to fund Cal Grants. COMMENTS 1) Purpose. According to the author, this bill seeks to increase Cal Grant B Access Award amounts for low income students to improve academic achievement and graduation rates. The tax credit differs from most others in that it leverages federal tax deductions for charitable contributions to incentivize contributions while ensuring the state does not lose money. The author contends the program would result in an extra $900 million over the first three years to increase Cal Grant awards. When the award was first established in 1969, the amount granted per student for the year was $960. Today, that amount has grown to only $1,473, while an inflation adjusted amount would be $5,900. 2) Interaction with Federal Charitable Contributions. This bill is inspired by a recent idea to "capture" federal dollars by enacting a state charitable tax credit. Based on recent IRS SB 798 Page 3 guidance that charitable contributions to a state fund are eligible for the federal tax deduction in the same manner as contributions to a charitable non-profit organization, the structure allows a taxpayer to benefit from both the state tax credit as well as a full deduction on the contribution amount from federal taxes. Such a favorable structure could result in the state raising significant money for this Fund, serving as a model for future programs. To the extent this bill generates $500 million of additional charitable contributions per year, it could result in annual federal revenue decreases of as much as $150 million. Such an impact could cause the IRS to reevaluate its guidance on state fund deduction eligibility. 3) Generous Incentive. This bill creates one of the most generous tax credits ever allowed in California. Under existing law, taxpayers may only claim a deduction for contributions to charitable organizations. A tax credit, however, may be much more valuable, particularly to corporate taxpayers. This bill may incentivize many corporate taxpayers to redirect charitable contributions to the Fund, creating a tax planning opportunity for corporate social responsibility programs while not necessarily increasing overall corporate giving. 4) Previous Legislation. a) SB 284 (De Leon) would have established a tax credit and voluntary contribution fund to benefit Cal Grants with a structure substantially similar to that contemplated here. SB 284 was vetoed by the Governor because it would have adversely impacted Proposition 98 funding. b) AB 2107 (Gorell) would have established a tax credit and voluntary contribution fund to benefit preschool education with a structure similar to that contemplated here. AB 2107 was held on the Suspense File of this Committee. Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081