BILL ANALYSIS Ó AB 337 Page 1 Date of Hearing: May 11, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 337 (Jones-Sawyer) - As Introduced February 13, 2015 Majority vote. Tax levy. Fiscal committee. SUBJECT: Personal income tax: credits: qualified teachers SUMMARY: Allows a personal income tax (PIT) credit for amounts paid by a "qualified teacher" for "instructional materials and classroom supplies". Specifically, this bill: 1)Contains the following legislative findings: a) While ensuring that a quality education for all of California's school children is a shared responsibility of the general public, it is foremost the duty of individual parents and teachers; and, AB 337 Page 2 b) State tax relief for education expenses, leveraged with current federal deductions, can further support and strengthen new teachers for successful careers in their noble profession. 2)Allows, for taxable years beginning on or after January 1, 2015, and before January 1, 2020, a credit equal to the amount paid or incurred by a "qualified teacher" during the taxable year for "instructional materials and classroom supplies", not to exceed $250. 3)Provides that, in cases where two "qualified teachers" are married to each other and file a joint return, the credit shall not exceed $500. 4)Defines a "qualified teacher" as a teacher who meets all of the following requirements: a) The individual has worked at least 900 hours in the school year as a teacher, in a school offering instruction in kindergarten or any of Grades 1 to 12, inclusive, in California at a public, charter, or private school that has a current private school affidavit on file with the State Department of Education in a school year; b) The teacher is primarily engaged in the duty of imparting knowledge to pupils by teaching, instructing, or lecturing; c) The teacher customarily and regularly exercises discretion and independent judgment in performing the duties of a teacher; and, d) The teacher is not employed as a tutor, teaching assistant, instructional aide, student teacher, day care provider, vocational instructor, or in a similar position. 5)Defines "instructional materials and classroom supplies" as AB 337 Page 3 books, supplies, computer equipment, including related software and services and other equipment, and supplementary materials used in the classroom, including supplies for courses in health and physical education, the amount paid or incurred for which is otherwise deductible under Internal Revenue Code (IRC) Section 162 and not reimbursed. 6)Provides that, for taxable years beginning on or after January 1, 2015, and before January 1, 2016, the credit shall only be allowed to a qualified teacher with no more than one year of employment as a qualified teacher. 7)Provides that, for taxable years beginning on or after January 1, 2016, and before January 1, 2017, the credit shall only be allowed to a qualified teacher with no more than two consecutive years of employment as a qualified teacher. 8)Provides that, for taxable years beginning on or after January 1, 2017, and before January 1, 2020, the credit shall only be allowed to a qualified teacher with no more than three consecutive years of employment as a qualified teacher. 9)Provides that, in cases where the credit amount exceeds the taxpayer's net tax, the excess may be carried over to reduce the taxpayer's tax liability in the following year, and succeeding four years if necessary, until the credit is exhausted. 10)Authorizes the Franchise Tax Board (FTB) to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this bill. 11)Provides that the Administrative Procedure Act (Government Code Section 11340 et seq.) shall not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the FTB under this bill. 12)Provides that Revenue and Taxation Code (R&TC) Section 41, which requires bills allowing a new PIT credit to articulate AB 337 Page 4 specific goals and objectives, shall not apply to this bill. 13)Takes immediate effect as a tax levy. 14)Sunsets on December 1, 2020. EXISTING FEDERAL LAW allows, for taxable years beginning before January 1, 2015, eligible educators to deduct up to $250 in expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment, and supplementary materials used by the eligible educator in the classroom. (IRC Section 62(a)(2)(D).) EXISTING STATE LAW: 1)Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses. 2)Requires any bill authorizing a new PIT credit to contain all of the following: a) Specific goals, purposes, and objectives that the tax credit will achieve; b) Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and, c) Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to AB 337 Page 5 meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.) FISCAL EFFECT: The FTB estimates General Fund revenue losses of $3.2 million in fiscal year (FY) 2015-16, $6.2 million in FY 2016-17, and $9 million in FY 2017-18. COMMENTS: 1)The author has provided the following statement in support of this bill: AB 337 will enable new teachers, in their first three years of service, to claim individual tax credits up to $250 for expenses relating to instructional materials and classroom supplies. This bill will provide teachers with necessary financial support to further strengthen new teachers for successful careers in their noble profession and in turn help their students succeed academically with these newly acquired resources. 2)Proponents of this bill note the following: AB 337 would allow K-12 teachers to claim an individual tax credit of up to $250 for out-of-pocket classroom expenses incurred during their first three years of fulltime teaching. Though modest, the benefit will provide tangible encouragement and support to those charged with the high responsibility of educating the young people of our state. AB 337 Page 6 While the cost to the state is expected to be minimal, the benefit to teachers will be substantial, especially when leveraged with the existing federal above-the-line deduction for similar expenditures on classroom supplies and materials. Most importantly, every dollar spent by those eligible to receive the proposed credit will find its way to a K-12 classroom, where it will redound to the benefit of students. 3)Opponents of this bill note the following: The fact that our teachers must use their personal funds to provide instructional materials for their students is a testament to just how much we have failed California's teachers. We believe that teachers deserve additional financial support from the state, but that support should not be in the form of a tax credit. The Legislature needs to take the time to properly address this problem and enact policy that would reform this system and keep teacher's hard earned money in their pockets. 4)The FTB notes the following implementation and policy concerns in its staff analysis of this bill: a) "This bill would allow a credit for qualified teachers based upon the years of employment as a qualified teacher. However, this bill fails to specify when or how recently employment as a qualified teacher must have occurred. For example, would the years of employment begin one year after the effective date of the statute or would a teacher's years of employment before the effective date of the statute qualify the teacher for the credit? To avoid conflicts between taxpayers and the department, the bill should be amended." b) "This bill would allow a credit for specified instructional materials and classroom supplies paid or AB 337 Page 7 incurred that may currently be deductible as employee business expenses. Generally, a tax credit is allowed in lieu of a deduction in order to eliminate multiple tax benefits for the same item of expense." 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). 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. While this affords taxpayers greater financial predictability, 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, effectively resulting in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. c) R&TC Section 41 shall not apply : On September 29, 2014, Governor Brown signed into law SB 1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC Section 41. SB 1335 recognized that the Legislature should apply the same level AB 337 Page 8 of review used for government spending programs to tax preference programs, including tax credits. Thus, Section 41 requires any bill introduced on or after January 1, 2015 that allows a new PIT credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives so-identified. The present bill provides that R&TC Section 41 shall not apply to this credit. The Committee may wish to consider the appropriateness of this Section 41 exemption. Advocates of the exemption may argue that obtaining useful performance data (e.g., teacher funds spent statewide on classroom materials) would be cumbersome in light of the relatively modest per-teacher financial subsidy proposed. Critics of a Section 41 exemption, however, might argue that the exemption exacerbates one of the primary problems inherent in crafting tax expenditure measures - namely, it is often unclear what objectives the Legislature is aiming to achieve. In this instance, it is not readily apparent whether the proposed credit is intended to incentivize increased teacher spending for classroom supplies or, alternatively, is designed simply to reward teachers who incur such expenses. While the Committee may determine that mandated data reporting is more appropriate in the context of larger tax subsidies (e.g., those given to business to encourage hiring), it may still be appropriate to articulate the purposes being served by this bill. d) An incentive or a reward ? Generally, tax credits are provided as a matter of legislative grace to encourage socially beneficial behavior that likely would not occur absent a financial incentive. Because this bill applies to taxable years beginning on or after January 1, 2015, this bill would be providing a credit for behavior that had already taken place before this bill's enactment. The AB 337 Page 9 Committee may wish to consider the policy implications of providing such an incentive. e) Subsidizing private school materials : This bill includes within the definition of a "qualified teacher" individuals working in private schools with a current private school affidavit on file with the State Department of Education. Advocates of providing a tax credit to public and private school teachers alike might argue that all new teachers should be encouraged as they begin work in an inherently noble profession. Critics, however, might question why scarce General Fund moneys are being used to subsidize the acquisition of materials and supplies at private schools, especially given that tax expenditure programs tend to decrease the amount of funds available for public education funding in the first instance. f) A question of percentages : Typically, credits are allowed in an amount equal to a specified percentage (e.g., 25%) of a taxpayer's qualifying expenditures. This ensures that taxpayers have some "skin in the game" by bearing at least part of the economic burden of the underlying activity. While this bill caps the amount of the total credit at a relatively modest $250 per year, the credit is allowed in an amount "equal to" qualifying expenses (i.e., 100%). Committee staff is not aware of any other credit operating in this fashion. g) Implementation concerns : It is currently unclear how the FTB would verify whether a teacher meets the eligibility requirements specified in this bill. As such, the FTB has suggested potential amendments requiring the appropriate local agency to certify teacher eligibility. Teachers could then retain such certifications and, upon request, provide them to the FTB for verification. Such a requirement would certainly ease the FTB's administration of this credit. At the same time, requiring local agencies to verify eligibility and produce certifications may be somewhat costly, especially in light of the relatively AB 337 Page 10 modest per-teacher credit involved. h) The Administrative Procedure Act : This bill provides that the Administrative Procedure Act shall not apply to any rule, notice, or guideline established by the FTB pursuant to this bill. It is not clear to Committee staff why an exemption from the Administrative Procedure Act is necessary in this instance. i) The former Teacher Retention Credit : For tax years 2000, 2001, and 2003, California teachers were eligible to claim a credit on wages received for services as a teacher for an amount up to $1,500. Eligible teachers completed form FTB 3505, Teacher Retention Credit, to claim the credit. The credit was suspended for 2002 and for 2004 through 2006 tax years. The credit was eventually repealed in 2007. j) Prior legislation : i) AB 2427 (Jones-Sawyer), of the 2013-14 Legislative Session, contained provisions substantially similar to this bill. AB 2427 was held on the Assembly Committee on Appropriations' Suspense File. ii) SB 413 (Knight), of the 2013-14 Legislative Session, would have allowed a credit for an eligible science, technology, engineering, or mathematics (STEM) teacher, as specified. SB 413 failed passage in the Senate Committee on Governance and Finance. iii) SB 693 (Correa), of the 2013-14 Legislative Session, contained provisions substantially similar to this bill. SB 693 was held on the Senate Committee on Appropriations' Suspense File. REGISTERED SUPPORT / OPPOSITION: AB 337 Page 11 Support California Association of Private School Organizations California Catholic Conference Los Angeles County Office of Education Opposition American Federation of State, County and Municipal Employees, AFL-CIO California Tax Reform Association California Teachers Association Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098 AB 337 Page 12