BILL ANALYSIS                                                                                                                                                                                                    

                                                                     AB 603

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          Date of Hearing:  May 27, 2015


                                 Jimmy Gomez, Chair

          603 (Salas) - As Amended May 21, 2015

          |Policy       |Revenue and Taxation           |Vote:|9 - 0        |
          |Committee:   |                               |     |             |
          |             |                               |     |             |
          |             |                               |     |             |

          Urgency:  Yes State Mandated Local Program:  NoReimbursable:  No


          This bill allows a tax credit under the personal income and  
          corporation tax laws equal to 25% of the qualified costs  
          incurred for conventional lawn removal by a taxpayer  
          participating in a lawn replacement program offered by a local  
          water agency, subject to a maximum credit of $1,500.  

          The bill applies to taxable years beginning on or after January  
          1, 2016, and before January 1, 2021, unless the state of  
          emergency with respect to drought conditions proclaimed by the  
          Governor on January 17, 2014, is terminated, in which case the  
          bill shall only remain in effect until December 1 of the year of  


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          The bill defines qualified costs as those costs eligible for a  
          rebate under the local replacement program in excess of the  
          amounts actually received from the local water agency, and  
          allows any unused credit to be carried forward, up to five  

          FISCAL EFFECT:

          1)Potentially significant GF costs to Franchise Tax Board (FTB)  
            to administer the changes to forms and systems.

          2)Estimated GF revenue decreases of $23 million, $26 million,  
            and $30 million in FY 2015-16, FY 2016-17, and FY 2017-18,  


          1)Purpose.  According to the author, grass is one of the most  
            water-intensive plants in landscaping, and outdoor irrigation  
            accounts for over 50% of all water used by residential  
            consumers.  To encourage water conservation, several local  
            agencies have established rebate programs to support customers  
            who replace traditional laws with drought-resistant plants and  
            landscaping.  The author argues the state has reduced water  
            use by 8.8%, but this remains short of the 25% conservation  
            target set by the Governor in his recent executive order.  AB  
            603 is intended to provide an additional incentive for  
            taxpayers to participate in lawn replacement programs offered  
            by local water agencies.


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          2)Local Water Rebate Programs.  Several local governments and  
            agencies offer rebate programs to encourage water  
            conservation.  For example, the Metropolitan Water District of  
            Southern California and the City of Sacramento Department of  
            Utilities both offer rebates for water-intensive turf removal  
            based on the square footage of turf removed.  The popularity  
            of lawn replacement programs is expected to increase as  
            residents continue to cope with the effects of the drought.

          3)Turf Removal Lottery.  The tax credit proposed in this bill  
            applies only to taxpayers participating in local water agency  
            lawn replacement programs, providing an additional incentive  
            for customers to apply.  Yet these programs are already  
            oversubscribed, with many more customers eager to participate  
            than local agencies can accommodate.  Adding a tax credit to  
            the benefits received by participants will incentivize greater  
            competition for participation, bestowing an even greater  
            reward on those who are selected, but will not result in  
            additional lawn removal.  The committee may wish to consider  
            whether those who are not selected to participate in local  
            water agency programs should be incentivized to remove their  
            lawns instead of rewarding those who were selected.

          4)Is Section 41 Already Doomed?  Tax credits are often used to  
            encourage or influence socially beneficial behavior, and  
            provide relief to taxpayers who incur expenses from desired  
            behavior.  Tax credits are often more appealing than tax  
            deductions as the taxpayer may take the same credit regardless  
            of income.

            This bill expressly ignores Section 41 of the revenue and  
            taxation code, authorized just last year in SB 1335 (Leno),  
            Statutes of 2014, which requires tax credits to articulate  
            specific goals, purposes, and objectives for the credit, as  
            well as establish performance indicators to measure the  
            credit's success in achieving those goals.  While the policy  


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            goals of this bill may be laudable, there is no indication  
            that 25% or $1,500 is the appropriate credit amount to achieve  
            the desired increase in lawn removal program participation,  
            and there are no metrics proposed with which to evaluate  
            whether the credit is achieving its aims.  Ensuring the  
            Legislature conducts some objective and dispassionate  
            evaluation of tax credits was the goal of SB 1335, and the  
            Committee might wish to consider whether this is precisely the  
            type of tax credit for which Section 41 ought to apply.

          Analysis Prepared by:Joel Tashjian / APPR. / (916)