BILL ANALYSIS Ó
AB 976
Page 1
Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 976
Steinorth - As Amended May 7, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal income tax: deductions: qualified pet
adoption costs.
SUMMARY: Allows a deduction, not to exceed $100, for qualified
costs paid or incurred adopting a pet from a qualified animal
rescue organization. Specifically, this bill:
1)Allows, for taxable years beginning on or after January 1,
2016, and before January 1, 2021, a deduction, under the
Personal Income Tax (PIT) Law, equal to the "qualified costs"
paid or incurred by a taxpayer for the adoption of a
"qualified pet" from a "qualified animal rescue organization."
AB 976
Page 2
2)Limits the deduction allowed for a taxable year to $100.
3)Defines a "qualified pet" as either of the following animals
adopted from a qualified animal rescue organization that is
not used by the taxpayer in a trade or business or for the
production of income:
a) A pet over that age of four, as determined by the
qualified animal rescue organization; or,
b) A cat.
4)Defines a "qualified animal rescue organization" as a public
animal control agency or shelter, humane society shelter, or
rescue group.
5)Defines "qualified costs" as amounts paid or incurred to a
qualified animal rescue organization to adopt a pet, not to
exceed $100.
6)Defines "rescue group" as an organization exempt from federal
income taxation, pursuant to Internal Revenue Code (IRC)
Section 501(c)(3), whose primary purpose is the placement of
dogs, cats, or other animals that have been removed from a
public animal control agency or shelter, society for the
prevention of cruelty to animals shelter, or humane society,
or that have been surrendered or relinquished to the rescue
group by the previous owner.
7)Repeals the statutory provision authorizing the deduction on
AB 976
Page 3
December 1, 2021.
8)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows, under the PIT, in modified conformity with federal
income tax laws various deductions in computing the income
that is subject to the taxes imposed by that law, including
miscellaneous itemized deductions that are allowed only to the
extent that the aggregate amount of those deductions exceed 2%
of adjusted gross income (AGI).
2)Allows for the deduction of certain expenses to arrive at a
taxpayer's AGI. These expenses include certain trade and
business expenses, losses from the sale or exchange of certain
property, alimony, and moving expenses. Thus, all taxpayers
with these types of expenses receive the benefit of a
deduction, regardless of whether the taxpayer itemizes
deductions or uses the standard deduction. These deductions
are known as "above-the-line" deductions.
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General
Fund revenue loss of $100,000 in fiscal year (FY) 2016-17, and
$100,000 in FY 2017-18, and $100,000 in FY 2018-19.
COMMENTS:
1)Authors Statement . The author has provided the following
statement in support of this bill:
AB 976 represents a modest investment towards supporting
AB 976
Page 4
our local governments and animal shelters. California
taxpayers currently spend over $120 million to support
local animal shelters for the ~ 800,000 pets they serve
each year. Overcrowding poses constant pressure upon
shelters to reduce their intake and holding time; the
simplest way to combat the problem is to increase adoption
rates.
Shelters have testified that providing discounted prices
for adoption have effectively increased their adoption
rates. While not an identical offer, it is reasonable to
infer that an ongoing financial incentive in the form of a
tax deduction will have a similarly positive effect in
increasing animal adoptions.
Increasing animal adoptions will help to relieve local
governments of the substantial cost pressure placed upon
them to support shelters. Rather than distributing
additional local government dollars to animal shelters, a
tax deduction places the power in the taxpayer's hands to
reduce their cost share. It is critical that the state do
its part in encouraging animal adoptions in an effort to
both reduce the cost to the public and save lives.
2)Arguments in Support : The Humane Society states that
"[w]hile the tax deduction provision that AB 976 would create
cannot address all that ails our state's homeless pets and the
AB 976
Page 5
agencies vested with looking out for their interests, it is a
relatively inexpensive and efficient way to send a strong
message to California taxpayers: that never before has their
compassion been more critical to improving the chances for
animals who have done nothing wrong other than prove too
expensive for their downtrodden owners. AB 976 asks
Californians to help out, and by promoting the benefits - to
the animals and to the government and charitable sectors - of
adopting rather than purchasing dogs and cats, the deduction
would increase the ability of municipal and charitable animal
protection organizations to continue their life-saving work."
The Humane Society further states that "the cost associated
with AB 976's provisions is modest when compared to the
potential for increased economic activity, reduced animal
sheltering costs and improved agency revenues, and lower
health and welfare expenses. Only very small increases in the
number of pet adoptions would be necessary to demonstrate the
investment value of providing this deduction."
3)Arguments in Opposition : The California Tax Reform
Association states that "[w]hile the intention of this bill is
reasonable, the legislature has previously rejected the use of
tax credits and deductions for animal adoption. Promoting the
adoption of animals from animal rescue organizations through
the mechanism of a tax deduction is poor public policy." The
California Tax Reform Association further states that the
deduction is poor public policy because the deduction is only
relevant to those who earn enough income to itemize, and the
choice of adopting a pet is properly motivated by compassion,
not finances.
4)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). This bill enacts a new tax expenditure
AB 976
Page 6
program, in the form of a PIT deduction, to encourage the
adoption of pets from qualified animal rescue organizations.
5)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. This can offer
taxpayers greater certainty, but 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. 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, without a
supermajority vote.
6)Above/Below the Line Deduction : An above-the-line deduction
is a deduction that allows a taxpayer to subtract amounts from
gross income when calculating their "adjusted gross income."
If the deduction is taken above the line, it is used to
determine the taxpayer's AGI. An above-the-line deduction can
be taken by any taxpayer regardless of whether the taxpayer
itemizes. Moreover, an above-the-line deduction reduces AGI,
and having a smaller AGI can lower many subsequent
calculations which will further reduce taxes. As a result,
above-the-line deductions are more advantageous than those
taken below the line. Once AGI is determined, a taxpayer can
either itemize deductions or take the standard deduction,
whichever is greater. Once itemized deductions exceed the
standard deduction, other smaller deductions, such as
miscellaneous expenses, can be applied to increase tax
savings. However, in order to take advantage of a
AB 976
Page 7
miscellaneous deduction, total expenses must exceed 2% of AGI.
Other deductions provide their own AGI threshold.
7)Incentive or reward ? Generally, tax expenditures are enacted
to encourage socially beneficial behavior that would not take
place without a financial incentive. As noted above, this
bill establishes a deduction to encourage the adoption of pets
from qualified animal rescue organizations. It would be
difficult to find a person who did not consider this a worthy
goal. At the same time, however, this bill limits the
deduction amount to $100 per taxable year. Applying a
marginal tax rate of 9.3%, this would translate to a tax break
of less than $10. The Committee may wish to consider whether
such an incentive is likely to encourage people to engage in
"new" behavior, or whether it would simply reward people who
would have adopted a pet in the absence of a deduction.
Additionally, given that less than one-half of individual
California taxpayers itemize their deductions; and given the
overall cap on total itemized deductions under the personal
income tax law, this clarification would result in many fewer
taxpayers being eligible to claim the deduction, and therefore
significantly lower impact to GF revenue.
8)Prior Legislation :
a) AB 2326 (Dickinson), of the 2013-14 Legislative Session,
would have allowed a deduction for qualified costs paid or
incurred adopting a pet from a qualified animal rescue
organization. AB 2326 was held on the Assembly Committee
on Appropriations' Suspense File.
b) AB 233 (Smyth), of the 2009-10 Legislative Session,
would have allowed a deduction for qualified costs paid or
incurred by a taxpayer for the adoption of a pet from a
qualified animal rescue organization. AB 233 was held on
the Assembly Committee on Appropriations' Suspense File.
AB 976
Page 8
REGISTERED SUPPORT / OPPOSITION:
Support
Humane Society of the United States
Opposition
American Federation of State, County, and Municipal Employees
California Tax Reform Association
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098
AB 976
Page 9