BILL ANALYSIS                                                                                                                                                                                                    

                                                                     AB 603

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          Date of Hearing:  May 18, 2015


                                 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  


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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.


          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  

               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  

          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  

             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  

              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  
              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  

              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 on this Committee's  
                 Suspense File.  

               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 currently a  
                 two-year bill.  



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          Association of California Water Agencies

          California Apartment Association

          California Building Industry Association

          California Landscape Contractors Association

          California Municipal Utilities Association

          City of Pasadena

          Desert Water Agency

          Metropolitan Water District of Southern California

          San Diego County Water Authority


          California Tax Reform Association


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          Analysis Prepared by:M. David  Ruff / REV. & TAX. / (916)