BILL ANALYSIS Ó
AB 717
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Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 717
(Gonzalez) - As Introduced February 25, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exemption: diapers
SUMMARY: Establishes a sales and use tax (SUT) exemption for
diapers designed, manufactured, processed, fabricated, or
packaged for use by infants and toddlers. Specifically, this
bill:
1)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for SUT revenues lost as a
result of this exemption.
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2)Takes immediate effect as a tax levy, but only becomes
operative on the first day of the first calendar quarter
commencing more than 90 days after this bill's effective date.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state.
2)Imposes a complimentary use tax on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser, and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
FISCAL EFFECT: The BOE estimates that this bill would reduce
state and local revenues by $46.7 million annually.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
It is time for California's tax code to reflect the fact
that diapers are an absolute health necessity for young
children. By updating our tax code to accurately identify
diapers as a necessity of life we can also make them more
affordable. The high price of diapers has a cost for
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public health and our economy. Diaper need puts families
in the position of changing their children's diapers less
often which has unhealthy consequences ranging from diaper
rash to infections requiring medical treatment. It also
creates a barrier between parents and gainful employment
when families cannot afford the number of diapers required
by childcare providers.
2)This bill is supported by the American Academy of Pediatrics,
California, which notes:
This legislation would follow the lead of seven other
states and exempt diapers from sales tax to enable
low-income families to better afford this necessity in the
care of their children.
An attempt to economize on diaper expense by less frequent
changes can lead to medical consequences for the baby, from
uncomfortable and inconvenient diaper rash, to more serious
conditions including abscesses and urine infections.
Moreover, low-income parents are less able to take
advantage of free or subsidized childcare if they cannot
afford to leave disposable diapers at child care centers, a
requirement for most childcare centers. Thus, lack of
sufficient diapers can lead to multiple problems for
families in need, including unhappy babies, unhealthy
communities, undereducated toddlers, and underemployed
adults.
3)This bill is opposed by the California State Association of
Counties, which notes:
The State Board of Equalization has estimated state and
local losses due to AB 717 would total $46.7 million
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annually. After the past thirty years of changes to sales
and use tax allocations, counties now receive almost half
of sales and use tax revenues. Approximately two-thirds of
that revenue is constitutionally dedicated to providing
local public safety services and federal and state programs
including social services, like CalWorks, and criminal
justice and rehabilitation services.
Therefore, we respectfully request that the local portion
of sales and use tax be unaltered by AB 717 and vital
dollars continue to flow to critical county service needs.
We have no concern with the state using their portion of
sales and use tax revenue to advance the policy goals set
forth by this measure.
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
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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. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) An overview of the SUT Law : California's SUT Law
imposes a sales tax on retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon a retailer's gross receipts from TPP sales in
California. The SUT Law also imposes a mirror "use tax" on
the storage, use, or other consumption of TPP purchased
out-of-state and brought into California. The use tax is
imposed on the purchaser, and unless the purchaser pays the
use tax to an out-of-state retailer registered to collect
California's use tax, the purchaser remains liable for the
tax. The use tax is set at the same rate as the state's
sales tax and must generally be remitted to the BOE.
The SUT represents the state's second largest source of
General Fund (GF) revenues. Nevertheless, the past 60
years have seen a dramatic reduction in the state's
reliance on the SUT and a corresponding increase in its
reliance on personal income tax revenues. In fiscal year
(FY) 2014-15, SUT revenues are estimated to comprise 23% of
the state's GF revenues, down from nearly 60% in FY
1950-51.
d) What accounts for the state's reduced reliance on SUT
revenues ? The SUT Law was enacted in a very different era.
In the 1930s, California's economy was largely dominated
by manufacturing, and residents mostly bought and sold
tangible goods. Thus, in establishing the base for a new
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consumption tax, it made sense to impose the tax on sales
of TPP, defined as personal property that may be "seen,
weighed, measured, felt, or touched." Over the past 80
years, however, California's economy has seen a dramatic
growth in the service and information sectors, resulting in
a significant erosion of the SUT base. For example, the
Commission on the 21st Century Economy noted that spending
on taxable goods represented 34.6% of personal income in
2008, down from 55.4% in 1980. As a result, tax experts
and economists from across the political spectrum argue
that California should expand its SUT base.
It could be argued that, while well-intentioned, additional
SUT exemptions further erode an already shrinking SUT base.
This, in turn, increases fiscal pressures to maintain or
even increase California's relatively high SUT rate. High
rates arguably promote non-compliance and encourage
out-of-state purchases, placing California retailers at a
competitive disadvantage. High rates also risk impacting
consumer decision-making, which runs counter to widely
accepted principles of sound tax policy.
e) What would this bill do ? This bill would provide a
complete SUT exemption for all diapers made for infants and
toddlers. The proposed exemption would apply to both
disposable and non-disposable diapers alike.
f) The diaper dilemma : By some estimates, up to 95% of
U.S. families use disposable diapers. Nevertheless,
environmental and health concerns have persuaded some
parents to purchase cloth diapers that can be reused.
Experts, however, are divided on whether reusable diapers
are more environmentally friendly. According to WebMD,
research suggests that both disposable and cloth diapers
impact the environment negatively - albeit in different
ways. Disposable diapers require more raw materials to
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manufacture and generate more solid waste for landfills.
Cloth diapers, on the other hand, use up large amounts of
electricity and water for laundering. Thus, the American
Academy of Pediatrics takes no position in the ongoing
debate regarding the relative merits of cloth versus
disposable diapers.
g) How are diapers currently taxed ? Current law does not
provide a SUT exemption for diapers. The BOE notes,
however, that businesses providing diaper services, where
cloth diapers are furnished in connection with the
recurring service of laundering the diapers, are considered
"consumers" of the diapers they provide. Thus, the tax
applies only to the diaper service's purchases, and the
business's diaper rental receipts are not subject to SUT.
h) An inherently regressive tax : The SUT has been widely
criticized as a regressive exaction that most heavily
impacts those least able to pay. For example, a survey by
the Nevada Legislative Counsel Bureau long ago concluded
that in the case of a retail sales tax with food exempt,
"the lowest income group would experience the highest ratio
of tax to income . . . ." (Survey of Sales Taxes
Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others,
however, contend that a degree of progressivity is provided
via the various exemptions built into most state SUT laws
(i.e., for certain necessities of life such as food,
housing, and medical care).
Proponents of this bill might argue that an exemption for
diapers would further promote a degree of progressivity in
an already regressive tax regime. Critics, however, might
contend that SUT exemptions are a blunt instrument for
affecting social policy. While this bill would provide
meaningful financial relief to low-income parents
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struggling to make ends meet, it would also provide relief
indiscriminately to wealthy consumers who might not even
notice the exemption. In addition, critics might question
why diapers are being singled out for preferential tax
treatment as opposed to other items of TPP indispensable to
raising a child (e.g., car seats, cribs, baby clothes,
bottles, strollers, etc.).
i) A more targeted approach ? To better target the
low-income parents this bill is aiming to assist, the
Committee may wish to consider whether a slightly more
tailored approach would be preferable. Specifically, if
the Legislature chooses to dedicate a certain amount of
money (e.g., $50 million annually) to help parents purchase
diapers, it might be preferable to channel this money
directly and exclusively to the beneficiaries of an
existing means-tested program. For example, existing law
provides for the California Work Opportunity and
Responsibility to Kids (CalWORKs) program, under which each
county provides cash assistance and other benefits to
qualified low-income families and individuals. AB 1516
(Gonzalez), of the 2013-14 Legislative Session, would have
established a young child special needs supplement of $80
per month within the CalWORKs program for each child
younger than two years of age in an assistance unit. AB
1516 was held on the Senate Appropriations Committee's
Suspense File. AB 492 (Gonzalez), in turn, would provide
that necessary supportive services would include vouchers
in the amount of $50 per month for diaper products for
every child two years of age or younger enrolled in child
care, as specified. AB 492 is currently pending by the
Assembly Committee on Human Services.
Alternatively, the Committee may wish to consider whether
it would be preferable to provide a SUT exemption for
diapers sold directly to nonprofit entities that, in turn,
provide free diapers to low-income and homeless families.
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The nonprofit Help a Mother Out organization notes that it
has provided diapers to low-income and homeless families
through a network of social service partners since 2009.
At the same time, this nonprofit notes:
For the present fiscal year, the sales tax assessed for
bulk purchasing diapers for our programs is close to
$22,000.00. That's critical funding that takes away from
our organization distributing more diapers to vulnerable
families through life changing programs.
j) Filling in the details : As noted above, this bill would
establish a SUT exemption for diapers designed and
manufactured for "infants and toddlers". This bill,
however, lacks definitions for these terms. Thus, it might
be challenging for retailers to determine with any degree
of precision which specific products qualify for the
exemption and which do not. The Committee may wish to
consider whether it would be beneficial to provide greater
definitional clarity through references to specific age or
weight ranges.
aa) Absence of a sunset date : In its current form, this
bill's proposed tax expenditure lacks an automatic sunset
provision. 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 an appropriate sunset provision.
bb) Prior legislation :
i) AB 1291 (Hollingsworth), of the 2001-02 Legislative
Session, would have provided a SUT exemption for diapers.
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AB 1291 was held on this Committee's Suspense File.
ii) AB 5 (Battin), of the 1999-2000 Legislative Session,
would have provided a SUT exemption for baby diapers,
whether disposable or not, and over-the-counter,
nonprescription drugs. AB 5 was never heard by this
committee.
iii) AB 13 (Dickerson), of the 1999-00 Legislative
Session, would have provided a SUT exemption for, among
other things, products for incontinence, including
disposable and reusable diapers, pads, and briefs. AB 13
was never heard by this Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
ACCESS Women's Health Justice
American Academy of Pediatrics, California
Black Women for Wellness
California Latinas for Reproductive Justice
Forward Together
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Help a Mother Out
National Center for Youth Law
National Diaper Bank Network
San Diego County Taxpayers Association
Opposition
California State Association of Counties
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098