BILL ANALYSIS Ó
AB 603
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Date of Hearing: April 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 603
(Salas) - As Introduced February 24, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Income taxes: turf removal tax credit
SUMMARY: Allows a tax credit, under both the Personal Income
Tax (PIT) Law and the Corporation Tax (CT) Law, equal to $2 per
square foot of conventional lawn removed from a "qualified
taxpayer's" property. Specifically, this bill:
1)Contains the following legislative findings and declarations:
a) California has been experiencing more frequent and
severe droughts and is currently enduring its worst drought
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in 200 years;
b) It is estimated that landscaping accounts for 60% of all
water consumed by residential customers. California lawns
cover more than 300,000 acres and consume more than 1.5
million acre-feet of water per year;
c) Californians have already begun to minimize lawn
watering by replacing conventional lawns with water-saving
and drought-resistant plants or artificial grass. These
landscaping alternatives are dependable tools for water
conservation; and,
d) In light of severe drought, California has an interest
in encouraging consumers to decrease water usage.
Establishing a state tax credit for the removal and
replacement of conventional grass landscapes will
incentivize water conservation.
2)Allows a credit, for taxable years beginning on or after
January 1, 2015, to a "qualified taxpayer" in an amount equal
to $2 per square foot of conventional lawn removed from the
"qualified taxpayer's" property.
3)Defines a "qualified taxpayer" as a person participating in a
"lawn replacement program" offered by a local water agency.
4)Defines a "lawn replacement program" as a local water agency
program that offers incentives to customers encouraging the
replacement of conventional lawns with artificial lawns,
drought-resistant plants, or other water-efficient
landscaping.
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5)Provides that this credit is allowed notwithstanding Revenue
and Taxation Code (R&TC) Section 41.
6)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Allows various tax credits under both the PIT Law and the CT
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 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
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.)
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3)Provides, for taxable years beginning on or after January 1,
2014, and before January 1, 2019, a gross income exclusion for
amounts received as a rebate, voucher, or other financial
incentive issued by a local water agency or supplier for
participation in a turf removal water conservation program.
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General
Fund revenue losses of $49 million in fiscal year (FY) 2015-16,
$60 million in FY 2016-17, and $85 million in FY 2017-18.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
In response to California's worsening drought, last year
Governor Brown issued an executive order to double the
state's water conservation efforts. The order urged
California businesses and residents to avoid wasting water,
including limiting lawn watering. Since then, Californians
cut water use by 8.8% statewide, falling short of the 20%
conservation target that Governor Brown set.
Grass is one of the most water-intensive plants in
landscaping. Its high water use and frequent maintenance
make it time-consuming and expensive. In fact, outdoor
irrigation accounts for over 50 percent of all water used
by residential customers.
To encourage water conservation, several local agencies
have established successful rebate programs to help
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customers replace traditional lawns with drought-resistant
plants and landscaping. For example, Southern Nevada Water
District's initiative resulted in the conversion of 100
million square feet of landscape with savings of over 18
billion gallons on water. The Santa Clara Valley Water
District estimates that it saves 36 gallons a year for
every square foot of conventional grass that is removed.
These programs are dependable tools for water conservation
and at least 26 water agencies currently maintain
successful initiatives. However, a statewide incentive to
encourage all Californians to take these important steps
towards water conservation does not exist.
AB 603 will provide a needed incentive to help Californians
conserve water.
2)Proponents of this bill note the following:
AB 603 can provide an additional incentive and relief to
those taxpayers who opt for a lawn replacement program to
lower water use. Specifically, this bill defines a "lawn
replacement program" as a program a local water agency
offers with incentives to customers encouraging the
replacement of conventional lawns with artificial lawns,
drought-resistant plants, or other water-efficient
landscaping.
For several years, the City of Pasadena's community-owned
utility, Pasadena Water and Power, has run a successful
Turf Replacement Program. Our turf replacement program
helps all our community-ratepayers, including commercial,
institutional, residential and multi-family water
customers, switch to a water- and money-saving landscape.
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Lawns typically use 50 percent more water than other
plants. Every year more and more Pasadenans are replacing
their thirsty lawns with colorful drought-resistant
landscaping that attracts birds and butterflies. Financial
incentives such as tax credits motivate that water saving
decision.
3)The FTB notes the following implementation and policy concerns
in its staff analysis of this bill:
a) "The bill lacks administrative details that must be
developed in order to implement the bill and determine its
impacts to the department's systems, forms, and processes.
This bill is silent on the following issues:
i) "How would the department verify that a qualified
taxpayer 'participated in a lawn replacement program'?
ii) "If a taxpayer removes the conventional lawn without
replacing the lawn with artificial lawn or
drought-resistant plants would they qualify for a tax
credit?
b) "This bill uses a term that is undefined, i.e.,
'conventional lawn.' The absence of definitions to clarify
these terms could lead to disputes with taxpayers and would
complicate the administration of this credit.
c) "This bill would allow a credit for a person
participating in a lawn replacement program without
requiring verification of expenses incurred to participate
in a lawn replacement program. If this is contrary to the
author's intent, the author may wish to amend the bill.
d) "This bill would allow a credit for lawn replacement
expenses that are currently deductible as business expenses
to taxpayers engaged in a trade or business under the
Corporation Tax Law. Generally, a credit is allowed in
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lieu of a deduction in order to eliminate multiple tax
benefits for the same item of expense."
4)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) California's drought enters its fourth year : California
is currently facing a fourth year of severe drought. The
Sierra Nevada snowpack, which provides roughly 30% of the
state's water supply, is currently at its second-lowest
level on record. The Federal Government has informed
farmers for the second year in a row that it will not be
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providing any water from its Central Valley Project
reservoir system. State regulators, in turn, recently
voted to impose a new round of water conservation rules,
including severe restrictions on landscape watering.
According to climate change simulations, droughts are only
likely to increase in both frequency and severity.
d) Where does our limited water go ? According to the
Public Policy Institute of California, California
agriculture is largely dependent on irrigation, which
accounts for roughly 80% of the state's human water use.
Households and non-farm businesses, in turn, account for
about 20% of human water use in California. Major
metropolitan regions in Southern California and the Bay
Area are still relatively well supplied, owing to
significant investments in conservation, infrastructure,
and supply diversification. In the northern and central
parts of the state, however, communities without diverse
water supplies have faced dramatic cutbacks in water use,
with some communities receiving emergency supplies from the
state. One important key to conservation is reducing the
amount of water used for landscaping, which currently
accounts for roughly 50% of all urban water use.
e) Local water rebate programs : In recent years, a number
of local governments and agencies have established rebate
programs to encourage conservation. For example, in an
effort to reduce water consumption, the Metropolitan Water
District of Southern California offers a rebate based on
each square foot of water-intensive turf removed.<1> To be
eligible for this rebate, customers must first apply for
and receive project approval. The approval, in turn,
specifies the square footage approved and the reserved
rebate amount.
The City of Sacramento Department of Utilities, in turn, is
currently offering cash to help customers remove their
-------------------------
<1> Rebates of $2 or more are currently provided for each square
foot of turf removed.
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front yard turf and replace it with native and drought
tolerant plants. Qualified applicants are eligible to
receive up to $1,000 ($0.50 per square foot of turf
removed) for their new landscapes. The popularity of such
programs is only expected to increase as California
continues to grapple with one of the worst droughts in its
recorded history.
a) Undefined terms : This bill would likely benefit from
greater definitional guidance. For example, this bill
defines a "qualified taxpayer" as a "person participating
in a lawn replacement program offered by a local water
agency." This bill, however, does not define the term
"local water agency." A "local water agency" would almost
certainly include the Metropolitan Water District of
Southern California, but it is unclear to Committee staff
whether it would also include municipal entities such as
the City of Sacramento's Department of Utilities. To avoid
confusion and ease administration of this credit, the
author may wish to consider further defining key terms.
a) Keep calm and carry forward : Statutes allowing new
credits are typically drafted to include standard "carry
forward" provisions. These provisions state that, in cases
where there is no further tax liability to offset for a
given taxable year, the taxpayer may carry forward the
remaining credit amount for a specified number of years.
The author may wish to consider amendments adding such a
provision.
b) Section 41 shall not apply : 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 introduced on or after January 1, 2015 that allows
a new income tax credit to contain specific goals,
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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.
This 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., year-over-year increases in turf removal
participation rates) would be cumbersome in light of the
relatively modest per-customer financial subsidy proposed.
Critics of a Section 41 exemption, however, might argue
that the carve-out 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 and how it plans to measure the attainment of
such objectives.
c) 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
Committee may wish to consider the policy implications of
providing such an incentive.
d) Absence of a sunset date : In its current form, this
bill's proposed tax expenditures lack automatic sunset
provisions. This Committee has a longstanding policy
favoring the inclusion of sunset dates to allow the
Legislature periodically to review the efficacy and cost of
such programs. The author may wish to consider the
addition of appropriate sunset provisions.
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e) Setting an example : Last summer, Arijeet and Rajvarun
Grewal, brothers and students from Pioneer Middle School
and Sierra Pacific High School in Hanford, wrote to the
author to propose their idea for saving "California one
drop at a time." The young students asked the author to
introduce a bill to incentivize the installation of
synthetic grass for California homeowners. On February 24,
2015, the Grewal family travelled to Sacramento to see this
bill, the outgrowth of their idea, introduced as
legislation.
f) Related legislation : The following related bills have
been introduced in the current legislative session:
i) AB 585 (Melendez) would, for taxable years beginning
on or after January 1, 2015, and before January 1, 2021,
allow a credit equal to 25% of the amount paid by a
qualified taxpayer for water-efficiency improvements made
to outdoor landscapes on qualified real property in
California, not to exceed $2,500 per taxable year, as
specified. AB 585 is pending hearing by this Committee.
ii) AB 1139 (Campos) would, for taxable years beginning
on or after January 1, 2015, allow a credit to a taxpayer
participating in a lawn replacement program, as defined,
in an amount equal to $2 per square foot of conventional
lawn removed from the taxpayer's property, up to $50,000
per taxable year, as provided. AB 1139 is pending
hearing by this Committee.
REGISTERED SUPPORT / OPPOSITION:
AB 603
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Support
City of Pasadena
San Diego County Water Authority
Sierra Club California
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098