BILL ANALYSIS Ó
AB 337
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 337
(Jones-Sawyer) - As Introduced February 13, 2015
SUSPENSE
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,
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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
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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
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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
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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.
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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
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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
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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
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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
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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:
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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
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