BILL ANALYSIS Ó AB 515 Page 1 Date of Hearing: April 27, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 515 Eggman - As Amended April 20, 2015 Majority vote. Fiscal committee. SUBJECT: Income taxes: credits: food bank donations SUMMARY: Expands the existing tax credit program under the Personal Income Tax (PIT) Law and Corporation Tax (CT) Law for contributions of qualified donation items to a food bank and extends the program until January 1, 2021. Specifically, this bill: 1)Revises the definition of a "qualified taxpayer" (QT) to include persons responsible for growing or raising a qualified donation item, or harvesting, packing, or processing a qualified donation item. AB 515 Page 2 2)Revises the definition of "qualified donation item" (QDI) to include, in addition to fresh fruits and vegetables, the following raw agricultural products or processed foods, as specified: a) "Fruit, nuts or vegetables" as defined in Food and Agricultural Code (F&AC) Section 42510; b) "Meat food product" as defined in F&AC Section 18665; c) "Poultry" as defined in F&AC Section 18675; d) "Eggs" as defined in F&AC Section 75027; e) "Fish" as defined in F&AC Section 58609; and, f) Any cheese, milk, yogurt, butter, and dehydrated milk meeting the requirements in F&AC Division 15. g) All of the following food items as defined in Health and Safety Code Section 109935: i) "Rice"; ii) "Beans"; iii) "Fruit, nuts, and vegetables in canned, frozen, AB 515 Page 3 dried, dehydrated, and 100 percent juice forms"; iv) "Vegetable oil and olive oil"; v) "Soup, pasta sauce, and salsa"; vi) "Infant formula"; vii) "Bread and pasta"; and, viii) "Canned meats and canned seafood." 3)Increases the allowed credit from 10% to 20%. 4)Provides that the allowed credit would be calculated, not according to inventory costs, but rather as 20% of the qualified value (QV) of the QDI. 5)Defines QV as, either: a) The QV shall be calculated by using the weighted average wholesale sale price based on the QT's total wholesale sales of the donated item sold within the calendar month of the QTs donation; or b) If no wholesale sales of the donated item have occurred in the calendar month of the QT's donation, the QV shall be equal to the nearest regional wholesale market price for the calendar month of the donation based upon the same AB 515 Page 4 grade products as published by the United States Department of Agriculture's Agricultural Marketing Service, or its successor. 6)Provides that the credit amount may not be less than what would otherwise be available as per existing legislation (Chapter 503, of the statutes of 2011). 7)Requires the donor to provide the food bank the QV and information regarding where the donation items were grown and/or processed. Upon receipt and acceptance of the donations, the food bank will provide to the donor a certificate with information, as specified. 8)Requires the FTB to include in its annual report the estimated value of the QDIs, the origin of the QDIs, and the month the donations were made. The report must be submitted in compliance, as specified. 9)Repeals the tax credit program on December 1, 2021. 10) Renames, on or after January 1, 2016, the State Emergency Food Assistance Program (SEFAP) as the CalFood Program (CFP). 11) Requires the CFP to provide food and funding for the provision of emergency food to food banks established pursuant to the federal Emergency Food Assistance Program. 12) Specifies that all monies received by the CFA, upon appropriation by the Legislature, must be allocated to the State Department of Social Services (SDSS) for allocation to AB 515 Page 5 the CFP. EXISTING LAW: 1)Allows a tax credit, under PIT law and the CT law, to qualified taxpayers (defined as the person(s) responsible for planting a crop, managing the crop, and harvesting the crop from the land) in an amount equal to 10% of the cost that would otherwise be included in, or required to be included in, inventory costs, as specified under federal law, with respect to the donation of fresh fruits or fresh vegetables to food banks located in California. (Chapter 503, of the statutes of 2011). 2)Requires the State Department of Social Services to establish and administer the SEFAP to provide food and funding to food banks. 3)Allows corporations that are members of the same unitary combined reporting group to assign "eligible" credits to other members of the group. An "eligible" credit is any credit earned by the taxpayers in a taxable year beginning on or after July 1, 2008, or any credit earned in any taxable year beginning before July 1, 2008, that was eligible to be carried forward to the first taxable year beginning on or after July 1, 2008. The credit assignment is made by an irrevocable election. The assignor and assignee taxpayers must be members of the same combined reporting for the taxable year in which the credit is earned and the taxable year the credit is assigned. 4)Applies performance measurement standards to any new tax credit under either the PIT or CT Law if enacted by a bill introduced on or after January 1, 2015. Specifically, existing law requires the all of the following: a) Specific goals, purposes, and objectives that the tax AB 515 Page 6 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 meet, or exceeding those specific goals, purposes, and objectives, including a requirement to specify both of the following: i) The baseline data, to be collected and remitted in each year the credit is effective, for the Legislature to measure the change in performance indicators; and, ii) The taxpayers, state agencies, or other entities required to collect and remit data FISCAL EFFECT: The Franchise Tax Board (FTB) estimates that this bill will reduce General Fund revenue by $.6 million in fiscal year (FY) 2015-16, $1.5 million in FY 2016-17, and $2 million in 2017-18. COMMENTS: 1)Author's Statement : The Author has provided the following statement in support of this bill: California is the leader agricultural producer in the U.S., yet many Californians still suffer from hunger and poor nutrition. AB 515 will broaden the existing state tax credit offered to agricultural producers for donations to qualified California non-profits, such as food banks. It expands the list of eligible products to include other fresh items and a limited set of core shelf-stable items. AB 515 Page 7 It also moves the tax credit to 20% of the donation items wholesale value, and extends the sunset of this program to 2021. 2)Committee Staff Comments . a) Existing Tax Credit . Under PIT and the CT laws, a qualified taxpayer is allowed a tax credit, in an amount equal to 10% of the inventory costs of the fresh fruits or fresh vegetables donated to food banks located in California. (Chapter 503, statutes of 2011.) b) Food Banks . According to the CAFB's Web site, California is ranked 19th for food insecurity in the nation with a food insecurity rate of 16.2%, translating into 6.1 million Californians with, on average, 1 out of 6 people in California not knowing where their next meal will come from. All the more troubling is that the child food insecurity rate is 26.3%, meaning 2.4 million, or more than 1 in 4 children, in California may go to bed hungry each night. CAFB represents 42 food banks throughout California that provide food to soup kitchens and food pantries in schools, churches, and community and senior centers. CAFB partners with over 100 California growers and packers and distributed 140 million pounds of food to people in need. c) Tax Credits . Tax credits are generally used to encourage socially beneficial behavior, to provide relief to taxpayers who incur specified expenses, or to influence behavior (including business practices). In contrast to the value of a deduction to a taxpayer, the value of a tax credit is the same, regardless of the tax rate. Thus, a tax credit is generally more appealing to taxpayers. Furthermore, charitable deductions allowed to corporate taxpayers are limited to 10% of the taxpayer's AB 515 Page 8 net income and thus a tax credit for the same donations will be more valuable to a corporate taxpayer. The author states that qualifying for the tax credit is cumbersome because of the difficulties associated with valuation of the products and categorical limitation. This bill addresses those issues by broadening the scope of what would be considered as a QDI and the product valuation issue by redefining how the product is to be valued. This bill also proposes a very generous 20% tax credit. However, increasing the allowable credit may not be necessary; at the very least, it may be premature. This bill expands the applicable QDIs and definition of a QT, which would theoretically already increase donations simply by widening the available pool of both participants and products. Moreover, in some cases a qualified taxpayer may be more inclined to contribute a QDI simply because he/she is not able to turn a profit by selling his/her products. In those instances, receiving the current 10% credit would be enough of an incentive. Receiving a larger credit may go beyond what is needed to encourage the desired result. Finally, increasing the "incentive" available for food donations does little to help a QT who is unable to navigate the cumbersome regulatory fields to become eligible in the first place. Alternatively, funding could potentially be more efficiently utilized by incentivizing other related programs, such as gleaning. Gleaning entails collecting leftover crops from farmer's fields after they have been commercially harvested or where it is not economically profitable to harvest. For these reasons, the Committee may wish to reduce the 20% tax credit provided for in this bill. AB 515 Page 9 d) Tax Expenditure . Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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). e) Tax Expenditure vs. 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. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, absent a sunset date, a two-thirds vote is required to rescind an existing tax expenditure once enacted. f) Section 41 . On September 29, 2014, Governor Brown signed 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 of review used for government spending programs to tax preference programs, including tax credits. Thus, Section 41 requires any bill that is introduced on or after January 1, 2015 and 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. AB 515 Page 10 While this bill does not create a new tax credit program per se, it does substantially expand the existing one. Thus, the author may wish to amend this bill to articulate the specific goal, purpose or objective of the bill. Performance indicators are critical in measuring the effectiveness of the tax credit, especially in light of doubling the amount of the credit. g) Qualified Taxpayers Outside California . This bill provides that a credit equal to 20% of the QV will be given to QTs that donate QDIs to food banks in California. However, whereas the donee must be in California, qualified taxpayers outside of California would be able to claim the credit as long as they meet the requirements of a QT and donate QDIs. Therefore, it is possible that General Fund money may be used to subsidize QTs outside of California. The Committee may wish to consider whether the benefits of potentially increasing the amount of donated food outweighs the costs of subsidizing producers located, and economic activities performed, outside of California. h) Qualified Taxpayer . Under the existing tax credit program, a qualified taxpayer is defined as a person responsible for planting a crop, managing the crop, and harvesting the crop from the land. The FTB noted the following implementation consideration when analyzing the previous bill [AB 152 (Fuentes), Chapter 503, Statutes of 2011] that implemented the existing program: The definition of a qualified taxpayer as the person that is responsible for planting a crop, managing the crop, and harvesting the crop from land is silent on AB 515 Page 11 requiring the person to be engaged in the business of farming and specifying that the crop is the source of the donated fresh fruits or fresh vegetables. As a result, "qualified taxpayer" could be more broadly interpreted than the author intends. This bill's provision mirrors the definition of a QT used in AB 152 that created the program with additional language expanding the definition to persons "harvesting, packing, or processing a qualified donation item." The Committee may wish to consider whether the existing definition of "qualified taxpayer" may have unintended consequences (especially, considering the bill's considerable expansion of the existing credit). 3)Prior Legislation : a) AB 152 (Fuentes), Chapter 503, Statues of 2011, required the State Department of Social Services to establish and administer a State Emergency Food Assistance Program, as specified. b) AB 727 (Correa), of the 2001-02 Legislative Session, would have established a tax credit equal to 10% of the normal inventory costs for the donation of agricultural products to a food bank in Fresno, Orange, or Santa Cruz Counties. AB 727 failed passage in the Senate Committee on Revenue and Taxation. AB 515 Page 12 c) AB 287 (Strickland), of the 1999-2000 Legislative Session, would have established a credit equal to 10% of the wholesale value of agricultural products donated by a taxpayer to a nonprofit charitable organization or food bank. AB 287 was held on the Assembly Committee on Appropriations' Suspense File. d) AB 196 (Thomson), of the 1997-98 Legislative Session, would have established a tax credit equal to 20% of the cost of agricultural products donated to a nonprofit charitable organization. AB 196 was held on the Senate Committee on Appropriations' Suspense File. e) AB 364 (Cannella), of the 1995-96 Legislative Session, would have, among other things, established a tax credit equal to 10% of the cost of food donated to nonprofit charitable organizations. AB 364 was held on the Senate Committee on Appropriations' Suspense File. f) AB 2346 (Kelley), Chapter 1248, Statues of 1989, established a very similar tax credit for the donation of agricultural products to certain nonprofit charitable organizations. This credit was repealed by its own terms on December 1, 1992. REGISTERED SUPPORT / OPPOSITION: AB 515 Page 13 Support None on file Opposition None on file Analysis Prepared by:Paul Kim / REV. & TAX. / (916) 319-2098